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The Interventionist State Revisited: The Political Economy Of State-Business Relations In India

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The Interventionist State Revisited: The Political Economy Of State-Business Relations In India

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Content INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, prim bleedthrough, substandard margin^ and improper alignment can adversely affect reproduction. In the unlikely, event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note win indicate the deletion. Oversize materials (e.g^ maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographicaUy in this copy. Higher quality 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. A Bell & Howell Information Company 300 North Zeeb Road. Ann Arbor. M l 48106-1346 USA 313/761-4700 800/521-0600 THE INTERVENTIONIST STATE REVISITED: THE POLITICAL ECONOMY OF STATE-BUSINESS RELATIONS IN INDIA by ANANYA MUKHERJEE A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Political Economy & Public Policy) May 1995 Copyright 1995 Ananya Mukherjee UMI Number: 9614049 UMI Microform 9614049 Copyright 1996, by UMI Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code, UMI 300 North Zeeb Road Ann Arbor, MI 48103 UNIVERSITY OF SOUTHERN CALIFORNIA THE GRADUATE SCHOOL UNIVERSITY PARK LOS ANGELES, CALIFORNIA 90007 This dissertation, written by Ananya Mukherpee under the direction of h.r& r.'C... Dissertation Committee, and approved by all its members, has been presented to and accepted by The Graduate School, in partial fulfillment of re quirements for the degree of DOCTOR OF PHILOSOPHY _ c . Dean o f Graduate Studies D a te B x J a.I?.?.'?. DISSERTATION COMMITTEE John E. Elliott .J.iLdi,th....G.ran.t - Robert Kalaba ii to my grandmother for overestimating my talents so consistently and for all her talents that did not find fulfillment Table of Contents Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Liberalization from What? State Intervention and Development: Towards a Theory The Efficacy of Intervention: Korea vs. India State and Capital in India: Intervention at the Moment of State Formation Evolution of Intervention in India: The Dynamics of Retrogression Chapter 6 Bibliography Conclusions Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table List of Tables 1: Distribution of Licenses according to Varying Levels of Installation 72 2. Distribution of Licenses Held by the top 20 Industrial Houses According to the Extent of Utilization (Production to Licensed) 73 3. Distribution of Licenses Utilized in Excess of Licensed Capacity According to the Licensee Category £ Level of Utilization 74 4. Concentration and Capacity in the Indian Corporate Sector, 1983 77 5. Import Availability ratios by Industry Groups 79 6. Expansions of the OGL List: 1978-79 to 1991 80 7. Actual Imports and Import Licenses Issued, 1979-1990 82 8. Distribution of Companies According to Export Intensity, 1976-84 83 9. Foreign-exchange Earnings and expenditure Pattern of 405 Companies 84 10. Escort Orientation of 131 Companies Belonging to the Top Twenty Industrial Bouses 85 11. Het Earnings of 131 Companies Belonging to the Top Twenty Industrial Houses 85 12. State Support to Exports, 1978-79 to 1991 86 1A: Goals of Planning in Korea: 1961-1980 88 IB: Goals of Planning in India (1951-1990) 89 5.1: Deceleration of Growth Rates in The Industrial Sector, 1960-75 140 5.2 Farm Procurement Prices and Profitability Ratios between 1967-68 to 1971-72 143 V Table 5. Table 5. Table 5. Table 5. Table 5. 3 Indice* of Profitability in the Private Corporate Seotor 1960-61 to 1986-87 4 The Distribution of Companies owned by Conglomerates according to the Share of Public Sector in Total Credit Employed 7 Growth in Assets of Top Twenty Conglomerates, 1972-1984 8 Growth in Assets of Top Twenty Houses 1984-1990 9 Concentration in the Indian Corporate Sector 144 161 169 170 171 Table 5.10 Relative Share of Cases Referred to the MRTP Commission By the Department of Company Affairs (DCA) 172 vi Figure 4. Figure 4. Figure 4. List of Figures 1. Fsctions within the Congress Party and their Social Linkages at the Eve of Independence 2 The Monopolistic Nature of Accumulation in India 3 Constraints on the Autonomy of the Indian State 101 110 118 vii AB S T R A C T This dissertation concerns the history of state intervention, particularly in the Third World. The significance of the nature of state intervention and the relationships between State and society that circumscribe such intervention is of utmost importance in evaluating the future of post-interventionist regimes. My thesis here are mainly three : (a) the success/failure of States in achieving the proclaimed objectives of intervention has been constrained by, and contingent upon the underlying mode of legitimation. Typically, these modes of legitimation encompass a particular relationship between the genesis and distribution of the social surplus, and hence, an associated relationship between the State and social groups whose interests may be essentially in conflict; (b) this mode of legitimation, and the underlying set of relationships evolve out of, and consolidate themselves through an historical process, which may be irreversible; (c) even though the State might attempt programs of change, it often can not (or does not) completely dismantle the mode of legitimation within which change is to be initiated. In the context of liberalization, legitimation may require the continuance of certain relationships associated with the interventionist regime, which are directly anti-thetical to the requirements of liberalization. Taking the case of India, this dissertation analyzes the evolution of the State-business nexus viii tracing it back to the creation of the independent Indian State. This analysis shows how State and capital entered into a collaborative arrangement very early on, which continues to determine the success of programs of change. In dissent with the neo-orthodox views on intervention, this work emphasizes that intervention per se has not been the obstacle to development; it is rather the historical relationship between State and capital, and more broadly. State and civil society, that determines the outcome of intervention. In other words, every model of intervention is circumscribed by a mode of legitimation which determines how far intervention can fulfill its objectives. This work draws upon the example of South Korea to illustrate this point. Chapter 1 LIBERALIZATION FROM WHAT? THE CONTEXT The reform efforts of the 1980s mark a significant change in the orientation of Indian economic policy that prevailed in the post-independence period. The primary thrust of this policy consisted of Import Substituting Industrialization (ISI) and welfarist state intervention (Govt, of India, Seventh Five Year Plan:1985) There is no clear agreement as to whether this policy has been "successful". On the one hand, state intervention has been able to build a commendable social and industrial infrastructure. On the other hand, it is argued that state intervention is also responsible for the inadequate development of capitalism, caused primarily by state controls on accumulation. The result of these counterproductive controls on capital, one important element of which was the restriction on foreign trade, are manifested in the economic crisis since the eighties (Jalan 1992:10). There are two ways in which the ill-effects of state intervention are conceived in the Indian context. The first, sees intervention as a complex of serious restrictions on corporate autonomy, which in turn limited economic rationality (Bhagwati 1993:5). The second argument addresses the ways in which state intervention has actually supported the largest factions of corporate and agrarian capital (Kurien 1994:93). It is in this context that the New Economic Policy (NEP) was undertaken in India since the mid-eigthies. The primary features of the NEP can be identified as follows. First and foremost, it was intended to revive Indian industrial growth, which, after an impressive performance in the fifties and sixties, had virtually stagnated since (Bagchi 1977; Mitra 1977; Nayaar 1978; Shetty 1977).1 Both the ruling regime and the business sector saw the primary impact of this stagnation as a decline in the purchasing power of the middle class, and hence a continuous contraction of the domestic market on which business was dependent for its profitability (particularly because it had eschewed the foreign market). As such, the NEP in India really began with an extensive dose of demand management through state intervention rather than a withdrawal of the State. Tax concessions to higher income groups and to corporations was one of the measures to achieve this objective. Substantial increase in salaries in the government and government-related sectors (such as higher education) and an unprecedented expansion of employment in the public sector were other measures. Together, these generated a vast domestic market of 75-85 million people, which, eventhough confined to the top 10 percent of the population, was enough to attract the interest of domestic and foreign investors (Kurien 1994:100). 1 These authors, along with many others, took part in what has been called the structural retrogression debate in India, which comprised the main theme of political economy in the seventies. As a result of these measures, industrial growth did revive, led by a phenomenal growth in consumer durables ranging from 8 to 22 per cent per annum during the period. Other sectors of industry also grew, particularly the capital goods sector which had been the worst affected by the decline. An overall industrial growth of 8 per cent, and an overall rate of growth of 5 per cent were recorded in this period, which was well over the trend growth rate of less than 4 per cent since the beginning of planned development.2 This 'new growth path' of the Indian economy was obviously laden with contradictions. For one, this was achieved through a very significant raise in public expenditure.3 Second, public expenditure was coupled with massive tax reductions so that the net result was a tremendous increase in public borrowing.4 Third, there was a tremendous growth in import surplus which eventually necessitated private commercial borrowing in addition to the borrowings fron the IMF. The average interest rate on India's official debt increased from 2.4 per cent in 1980 to 6.1 per cent in 1982. Similarly, the average maturity of loans declined from 40.8 years in 1980 to 2 The date here is primarily from Jalan 1992, various chapters. 3 Public expenditure rose from Rs.17,800 crores (Rs 1780 billion) in 1980-81 to Rs.82000 crores (Rs.8200 billion) in 1989-90 (Reserve Bank of India Bulletin, various years). 4 The fiscal deficit in 1986-87 touched an all-time high of 9 per cent of the GDP (Reserve Bank of India Bulletin, 1988). 24.4 years in 1989. However, external borrowings continued, increasing to about 21.5 per cent of the GDP ($56.3 billion) in 1989. Outstanding debts to private creditors increased ten-fold between 1982 to 1990 (to $22.8 billion in 1989), and debt service as a percentage of GNP increased from 9.1 per cent to 26.3 per cent over the same period. Thus, the 'new growth path' of the Indian economy, comprising a combination of jobless growth and a huge debt, led quite directly into the crisis of 1991.5 Bimal Jalan, who was then the Chairman of the Economic Advisory Council of the Prime Minister Chandra Shekhar, identified the financial profligacy of the earlier regime and severe political instability (including the Ayodhya Riots) as the primary cause behind this crisis (Jalan 1992:1). In addition, the crisis of debt-servicing and the falling maturity period of loans initiated a capital flight since 1989.® Foreign exchange reserves dropped to an all-time low 5 The jobless nature of the growth derived out of two factors. First, the expansion of the public sector comprised income increases for existing employees, rather than creation of new jobs. Second since most of this income expansion was targeted to the urban middle-class, it resulted in an increased demand for consumer durables. Since this demand expansion was also associated with the liberalization of imported inputs, most of the consumer durable production was achieved by assembling inputs imported from abroad. Some domestic production also occured, but mostly with the help of labor-saving techniques. 6 The flight amounted to $102 million in October 1990, went down to $11 million in February 1991, but then shot upto $373 million in April and to $330 million in June. The total added up to $1.33 billion (Economic Survey 1992-93, cited in Kurien 1993:100). and inflation crossed double-digits for the first time, resulting in a substantial reduction in India's credit rating (Jalan 1992:3-4). It is in this context that the new regime of Narsimha Rao and Dr.Manmohan Singh as his Finance Minister turned to the IMF loan in 1991. As is well-known, the conditionalities of the IMF loan required a serious structural adjustment of the Indian economy, of which economic liberalization is an integral part. It the issue of economic liberalization that I wish to address in this work. The primary purpose of this work will be to discuss the specific context, marked by a "crisis" and an interventionist past, in which liberalization is being attempted, and the contradictions that this is likely to unleash. My own conclusion with respect to the outcome of the new policy is that economies like India must end up with a version of contingent liberalization. Contingent liberalization will imply a mix of policies from the interventionist regime and the liberal regime which will support the same type of state/civil society (especially state/business) relationships that have evolved over time. Liberalization, to the extent that it threatens to change this fundamental orientation of state/civil society relationships may not ultimately be politically feasible. THE ARGUMENT Economic liberalization encompasses a set of policies that seek to reduce the role of the State in the political- 6 economic structure.7 Essentially, the rise of liberal ization as a paradigm of political-economy symbolizes the resur gence of a neo-liberal orthodoxy that holds as its ideal the minimalist state, centrality of the market and the freedom of private enterprise.0 This resurgent neo-orthodoxy draws upon a specific interpretation of the experience of those countries which had consciously chosen an "interventionist" path during the past three decades and, allegedly, have found themselves in deep structural crises. These crises include, but are not restricted to, the crises of growth, accumulation9 and external balances (IBRD 1981:4-24; IMF 1983:20; IBRD 1985). 7 Broadly speaking these policies include free trade, export-led growth, fiscal conservatism, privatization etc. They run contrary to a set of policies that include extensive state intervention, expansionary fiscal policies, protective trade regime, large public sectors etc. This latter set of policies, which see a significantly larger role of the state than the market in the political-economic structure, is what I refer to as "interventionism" in this work. aThe resurgence implies a return to the neo-orthodox market-centric approach in the eighties from the state-centric approach that first emerged in the fifties. The period between the fifties and the early eighties saw a growth in the economic role of the State in most parts of the developing world, resulting in what has been termed as various forms of "heterodox" approaches to political economy. The critical feature of such heterodoxy was the intermingling of state- centric and market-centric approaches; the neo-orthodoxy, by contrast is related to the strongly market-dominated approach of the pre-Keynesian years {Kahler 1990:33-61). 9,,Growth" indicates a sustained increase in the macro- economic indicators like the level of national income and investment. It does not usually refer to the distributive implications of such increase. "Accumulation" refers on the other hand, to the increase in the levels of privately appro priated surplus over time. The standard indicators of accumulation are the level of corporate profits, the rate of 7 Theorists belonging to this neo-orthodox school hypothesize a direct relationship between interventionism and structural crises. First, statism has resulted in crises by inhibiting free enterprise through its elaborate mechanisms of control. In that sense state intervention, per se, has allegedly been the primary obstacle to growth. Even where the State has initiated or aided the process of modernization, the benefits of state action have been far exceeded by the costs, primarily in the form of rent-seeking.10 Hence, successful development of the future requires a dismantling of the State apparatus, complemented by the extension and consolidation of market mechanisms. In order to engineer this transformation from a rent- seeking economy to a market economy. States must undertake structural adjustment programs (IBRD 1981; IMF 1983; Baker Plan 1985; Lipton 1977; Bates 1981; Friedman 1983; Eckhaus 1985). These attempts at structural transformation, the neo-orthodox profit, the growth in corporate assets and total sales of companies. The neo-liberal paradigm proposes a necessary correlation between accumulation and growth that is not always corroborated by empirical evidence, especially in the Third World (Amsden 1989:68). 10The "rent-seeking school" advances the notion of a State that deliberately imposes restrictions on private enterprise, and then, agrees to remove these restrictions in exchange for a share of the surplus in the form of "rent". As the State expands and consolidates its power, the number of restrictions increase, and an increasingly greater share of the social surplus is extracted in the form of rents (Krueger 1974; Colander 1984; Srinivasan 1985:38-58; Buchanan, Tollison & Tullock 1980). As I explain later, I disagree with this approach. theorists argue, may create short-run problems of legitimacy by altering the configuration of interests that exist under interventionism. If the State does not yield under these short term pressures, a new balance of forces more conducive to competitive capitalism will emerge in the long run (Friedman * 1983). The experience of countries attempting structural adjustment during the eighties have largely contradicted these assumptions of the liberalization thesis (de Soto 1989; Dutkiewicz & Williams 1987; Nelson 1990). States have been faced with myriad, and sometimes insurmountable problems in administering structural adjustment; most of their problems arise out of fundamental institutional deficits faced by the State (Callaghy 1989:115-38). In fact, there is increasing evi dence that countries which are not successful in implementing structural adjustment programs have also been largely unsuc cessful in implementing their interventionist programs: the failures, of both types of policy, arise out of a fundamental inability of the State to influence the behavior of private actors, especially private capital (Evans et al 1985:44-77; Evans 1992:141). The theorists of liberalization see the interventionist State's inability to influence private capital as deriving directly out of intervention, since these theorists see intervention as a complex of policies that necessarily contradict the interests of private capital. In the context of this assumption, it needs to be emphasized that intervention in most countries has worked in an essentially contradictory manner. On the one hand, capital has enjoyed numerous aids to accumulation under intervention. State-aided development of industrial infrastructure, supply of cheap credit, trade protection etc. are only some of the ways in which interventionist states have aided accumulation.11 Most importantly perhaps, interventionist states have also come to be characterized by oligopolistic or monopolistic market struc tures, where these market distortions have been consciously engendered by interventionist policies. Arguably, this kind of aid to accumulation has systematically yielded levels of corporate profits higher than would have been possible under market competition. Because of the specific institutional mechanisms developed by the typical interventionist state, profits came to be composed of two components: 1) profits in the sense of "pure" economic profits, earned as a result of minimizing costs and maximizing revenues under competitive conditions; and, 2) rents, in the sense of incomes earned by 11 State-aided and/or state-led accumulation represents the reality of most Third World countries since the fifties. The most notable and successful example of this are the East Asian states. Latin American countries, most notably Brazil and Peru have also had high degrees of state aid in accumulation (Evans 1979; Stepan 1978). As I will discuss, in India state intervention has also played a central role in accumulation (Bardhan 1984; Kurien 1989; Bagchi 1972; 1992). 10 virtue of specific institutional mechanisms of intervention (rather than marJcet forces) under which firms operate. It is this rent component of corporate earnings that liberalization tends to threaten, since it calls for the dissolution of those specific mechanisms that generated these rents. While the reformists speak of the rent-eroding capacity of liberalization as a "good", especially in that they see the volume of profits going up as rents decrease, they overlook the fact that a part of these rents also accrued to firms. In fact, the rent has been historically distributed amongst the State, the corporate oligopoly, the bureaucracy, and other dominant classes according to the balance of power between these groups. However while at the same time that interventionist state fostered accumulation in the ways discussed above, it also imposed some controls on accumulation. It did this allegedly in order to ensure that the broader objective of "development" was not compromised. These controls affected corporate incomes and profitability in three ways : a) enhancing the State's claim to the total volume of rent generated in the economy, by taking on distributive responsibilities; b) using these controls to reduce the total volume of rent generated in the economy, by imposing anti-trust regulations, for example; and c) some interventionist states, while allowing business to collect a part of this rent, maybe even the larger part, strictly ensuring that this part of the rent was to be used as reinvestible capital. In order to fulfill one or more of three objectives, the State had to impose 11 serious restrictions on corporate autonomy. The frequency and the extent of these restrictions differed of course, amongst different countries, and according to the state-business relationships that characterized those countries. Given these contradictions and differences which have characterized intervention, can it be unequivocally assumed that all types of capital under all interventionist regimes is unambiguously in favor of liberalization? It can be empirically demonstrated, for example, that the interventionist State has infused within the respective corporate sectors (especially the large, oligopolistically organized factions of corporate capital) a fundamentally anti competitive ethos by protecting them from both internal and external competition. This anti-competitive ethos is reflected particularly in the resistance to the liberalization of trade and the entry of foreign capital. Possibly the most important example of this comes from South Korea, where the State, historically one with a very high degree of autonomy, cannot implement its liberalization program because of pressures from corporate capital, who are in favor of liberalization in so far as it removes restrictions on the freedom of capital to decide the principles of investment, but not where it reduces the rent income from distorted market structures (Jin-Sul 1984:25).12 Why 12 A Monopoly Regulation and Fair Trade Law was introduced in Korea in 1981. It aimed to regulate pricing practices as well as cross-ownership among chaebol subsidiaries. Big 12 would firms insist that the State withdraw from its mediating role between business and labor, between foreign capital and domestic capital, between large firms and small firms, when under most interventionist arrangements such mediation has often worked, and more importantly, will always have the potential to work in favor of big business? Once we acknowledge this fundamental ambiguity in the response of the private sector to liberalization, I are forced back to the problem of the State's ability to consolidate the reform program, despite such resistance from the private sector. In other words, the question of state capacity is not one that concerns intervention only, or any specific kind of policy regime, but one that concerns the relationship between state and capital (or private actors), and the contingencies it imposes on attempts at change. The critical question that emerges is whether the State can push through a program of change despite resistance from particular interests, especially those of the dominant classes? One hypothesis in this regard is as follows. The extent to which the State can execute a chosen agenda is determined by its degree of autonomy. In the broadest sense, I will take autonomy to mean the ability of the State to business maintained that the law reduced the vitality of business that had been critical to Korea's long-term growth. The Head of the Office of Fair Trade commented on this resistance as follows. Those complaints come largely from businessmen who are used to privileges and protection. The spirit of the Law is to provide equal opportunity for all companies.... Businessmen should realize that their survival depends on upon their own ability to compete rather than on their privileges and government protection. (Lee Jin-Sul in Business Korea, December 1984, p.25). 13 behave In chosen ways and develop projects without excessive interference from dominant groups, and to implement those projects, even when they contradict dominant interests. The relevant question then, is to identify the limits and con straints that operate on state autonomy. One such limit, I will argue, is posed by the State's requirement of legitimacy, where legitimacy is defined as the ability of the State to justify its projects as reflecting shared beliefs of the majority, as opposed to particular interests (Beetham 1991). It then becomes pertinent to ask how the concern for legitimacy weakens or reinforces the constraints on autonomy. What are the institutional resources available to the State to attain legitimacy and hence enable it to act autonomously? What are the inadequacies of these institutions? How do they need to change in order to make possible the transition from intervention to liberalization? Of late, a large volume of literature on development, especially of the types witnessed in East Asia, has focused exclusively on the question of institutional resources of the State, and the degree to which they permit State autonomy in the sense defined above. This strand of development theorizing takes as its major variable the characteristics of the State and its relationship to social structures (Johnson 1982; Amsden 1989; Evans 1989; Evans 1992; White & Wade 1988; Wade 1990; Haggard 1990). 14 This work attempts to characterize the inter-rela tionships between nature of state intervention, state autonomy, and social structures by analyzing the case of India. Contrary to the common interpretation of intervention in India - that the Indian state had too comprehensively invaded private enterprise (Krueger 1974; Lai 1988; Bhagwati & Srinivasan 1984), our thesis here will be the following. Comparing India to the developmen tal state of South Korea, I will argue that despite being able to establish an elaborate mechanism of control on capital, the Indian State has not been able to influence the behavior of capital in the sense of the developmental state. In order to develop this argument, I will characterize the difference between Indian and South Korean intervention as a difference between reciprocity and unidirectionalism. In brief, reciprocity implies that the State supports private actors only when they behave and perform in a manner that helps the State further its own goals; by contrast, intervention becomes unidi rectional when state support to private actors is not made contingent upon the effect of their behavior on the realization of the State's goals (Amsden 1989). In other words, I will see how reciprocity reflects the existence of an autonomous state that is required to extract performance from capital, and conversely, unidirectional intervention reflects the absence of, or constraints on, state autonomy. The second task of this work is to ask why intervention becomes unidirectional. Why is it that with all its institutional resources, and its centrality in the process of accumulation, the State is not able to affect the behavior of capital? More specifically, why is the State not able to withdraw its aid to accumulation when capital does not comply? Some theorists argue that the problem is purely one of executive efficiency. In the context of that argument, reciprocity derives out of the cohesion and efficacy of bureaucratic appara tus, and the extent to which the bureaucracy is free of rent- seeking tendencies. While this may be a partial explanation, these arguments tend to reduce the State to the bureaucracy, and in so doing, ignore the ways in which limits on the autonomy of the bureaucracy actually reflect the limitations of the State. I argue in this work that the character that inter vention assumes over time is shaped by an interactive process comprising the initial set of relationships between the State, civil society and transnational forces under which intervention is undertaken, and the way in which these relations evolve as a consequence of intervention itself. The initial set of relationships (State/capital, State/labor, State/transnational actors, institutional patterns/social structures, economics/politics etc.) may in some ways pre-define the trajectory of intervention, but probably not irreversibly. In fact, the steps that social entities take to overcome initial constraints are in themselves integral elements of the dialectics of interventionist development. 16 For example, if the capitalist class is well-developed, and has consolidated itself before the formation of the State, then the State is faced with a strong commitment to assist capital in accumulation. Similarly, if the State owes its existence to mass mobilization against an oppressive regime, through which political and economic demands of the popular sectors have become articulated, then the State must also embrace particular pro-labor and anti-capital policies to legitimize itself from the perspective of these popular sectors. In other words, depending on the degree to which the demands of different groups, and the essential conflict between these groups, are articulated, the State will need to allocate its resources between accumulation and legitimation.13 For example, the State may have to begin with a collaboration with capital to strengthen the capitalist structure; or else. State and capital 13 I define accumulation according to the classical surplus approach; "accumulation consists of the productive investment of part of society's net product— the surplus over consumption and depreciation allowances— in order to expand productive capacity to take advantage of new or developing markets. The study of accumulation therefore needs to explain both the availability or this surplus and the motivation for ploughing it back.(Nell 1987:14). Legitimation, as I will show in Chapter 2, is a dynamic process through which the State tries to engender belief in itself. In class societies, legitimation can be defined as a dynamic relationship from the perspective of the subordinate classes, for which it needs to appear neutral between classes without actually being so. In order to project this neutrality, the State must simultaneously indulge in two contradictory activities ; accumulation (in order to gain legitimacy from the perspective of capital) and legitimation (in order to gain legitimacy from the perspective of labor)(Offe 1973:127; O'Connor 1973). 17 may collaborate In effecting a particular type of structural change, as In the case of a potential transformation from feudalism to industrial capitalism. Is it possible for the State to navigate the behavior of capital once such collaboration occurs? Several hypotheses seems to suggest themselves. A collaboration occurring in an initial condition where capital is strong may systematically limit the ability of the State to assert its autonomy. Alternatively, the dependence of capital on the State to foster accumulation under conditions of general capital constraint, may enhance autonomy. This may be particularly the case if, in order to foster accumulation, the State has to develop a complex nexus of institutions which increase the ability of the State to effectively control capital. Amidst such structurally engendered paradoxes, the relationship between state and capital ceases to be consistently collaborative or conflictual, and as such can not be adequately explained by instrumentalist or neo classical economic theories. Rather, the relationship assumes the form of a dialectic between conflict and collaboration, dominated by the State at times and by capital at others. To sum up, using the theoretical ideas mentioned above I will attempt in this work to explain the failure of intervention in India by drawing upon the case of South Korea. The critical difference between the two states lies in the nature of state autonomy. The primary factor that constrains state autonomy in India is the historical relationship between the State and 18 capital which necessitated a particular response to the contradiction between accumulation and legitimation. Intervention in this schema becomes a means by which the State attempts to resolve this contradiction. SCOPE, METHODOLOGY, AND DATABASE Drawing upon these notions of autonomy, accumulation and legitimation, I will attempt here an historical explanation of the constraints on state autonomy. Our focus here is on the case of India, and on trying to identify the constraints on the autonomy of the Indian State as they have revealed themselves in the interventionist period, and as they are likely to affect the on-going transition to liberalization. The period covered here extends from 1947, the year in which the independent Indian state came into being, up through 1990, the year immediately preceding the onset of economic liberalization. My methodological approach is to construct a historical narrative of the experience of intervention in India using South Korea as a model. Without directly or separately discussing the Korean case, I will use the Korean model of .intervention in order to explain the systematic constraints to state autonomy that characterize the Indian case, in the context of the model of an autonomous developmental state. The rationale behind this choice should become clearer as I proceed; for the moment let us note two possible justifications. First, intervention in India and Korea has had the same objective. Central to the framework of industrial 19 policy in both countries was the objective of bringing firm behavior in line with the broader objective of development. In addition, similarities exist in 1) the problems at which intervention was directed, and, 2)the instruments of intervention which they have employed. Second, both countries have had a colonial past requiring domestic firms to interact with foreign capital. Identifying the basic contours of this relationship as it has existed historically may provide important insights into how the prospects of liberalization are likely to be affected. Finally, let me mention one other methodological point, concerning the role of structures in theoretical explanations. Although my analysis of the character of intervention in Korea and India will use the initial structure as a major explanatory variable, I will not use this static notion of structure as the only source for deriving political outcomes or consequent structural patterns. Instead, as I mentioned above, I will proceed with the methodological pre-supposition that contradictions between components of the structure are what define the developmental logic of any social entity. In this methodological scheme, the initial structure itself has to be regarded as an outcome of the historical process (Jones 1987:833-6). As regards the database, this work draws to the extent possible, upon primary sources like original plan documents, memoranda, published proceedings of the Planning Commission, and 20 other public documents available with the various ministries, the Parliament of India and the Planning Commission. The lacunae have been filled by secondary documents and published works on the history of the Indian state. PLAN OP THE WORK Chapter 1 has stated the problem that I propose to investigate, and discuss the important elements of methodology and database. However, the primary component of my methodological approach is the theoretical framework that I develop for the purpose of my historical analysis. This framework is presented in Chapter 2. The primary thrust of this theoretical framework is to hypothesize a relationship between a)the historical character of the state-capital nexus, b)the kind of state autonomy that this history permits, and e)the impact of this particular character of state autonomy on the efficacy of intervention. More generally, my attempt will be to relate the historical context and its effect on state autonomy to the issue of the capacity of the state to bring about different programs of structural change, from feudalism to industrialization, from oligopolistic capitalism to competitive capitalism, etc. Chapter 2 will also present a review of the relevant literature in order to set the context for the theoretical framework. In my review, I will suggest ways to 21 categorize the literature on state Intervention and offer critiques of each category of literature that I discuss. Chapter 3 will take us to the empirical analysis of intervention in India and Korea. My objective will be to demonstrate the difference between what I have defined as the principles of reciprocity and unidirectionalism. This discussion will consist of a detailed review of the mechanisms of intervention in Korea and India, and a comparison of the industrial licensing mechanism and state intervention in foreign trade between the two countries. This empirical review will lead us to the question as to why the difference between reciprocity and unidirectionalism occur and how they derive out of the specificities of history. These two chapters will take up two distinct phases in the history of Indian intervention: from 1947-1965 and from 1966-1990. Chapter 5 will focus especially on the problem as to how an interventionist state may create the limits to its own autonomy. The period discussed here is marked by the presence of oligopolistically organized corporate capital, the consolidation of which, in a sense, has been aided by intervention. The contradiction unleashed by this process and the possible limits that this may set on the transition to economic liberalization, will comprise the central concern of this chapter. In Chapter 6, which is also the final chapter, I will present the conclusion of this analysis. Finally, I will discuss the implications of the analysis with respect to the general problem of contingencies imposed by the relationship between dominant societal groups on attempts at change. One implication of my analysis will be the brief discussion of "contingent liberalization", which I see as the globally emerging mode of liberalization in the near future. 23 Chapter 2 STATE INTERVENTION AND DEVELOPMENT: TOWARDS A THEORY In Chapter 1, I proposed the argument that the differential effects of state intervention can be explained by the differential constraints on State autonomy that emanate out of the historical relationship between State and different social groups. In this chapter, I will present a theoretical framework to develop this argument. First, I will review the literature on state intervention by categorizing the literature into three basic groups. The first comprises theoretical attempts at explaining intervention. Their orientation is one of political economy in the sense they systematically attempt to connect the intent of State intervention to its outcome.1 This orientation will also direct my own investigation. The second and thirds groups of literature consider the specific contexts with which the work is concerned: East Asia and India. My review will orient itself according to the theoretical notions I introduced in Chapter 1, most importantly, those of autonomy, constrained autonomy, accumulation, and legitimation. This will lead us directly to the second part of this Chapter where I will present my own theoretical framework. This theoretical formulation will complete the postponed discussion on methodology in Chapter 1. 1For a detailed discussion of the various foci around which the discussion of state intervention may be organized, see Chang:1994. 24 THEORIES OF INTERVENTION: A CRITICAL ANALYSIS Keeping in mind that our focus is on identifying the intent of intervention, I can identify two basic classes of relevant theories. The first, represented typically by the Dependency theory, views the State as essentially pro-capital, and hence characterized by a collaborative relationship between state and capital. The intent of the State is largely to augment accumulation. The second type of theory, represented by the rent-seeking school, envisage a conflictual relationship between state and capital; the intent of the State here is to control and restrict accumulation in order to maintain its image as a pro-labor State. A. Collaborative Theories of Intervention As I mentioned in Chapter 1, I define state autonomy as the ability of the State to determine the basic orientation of development independently of class demands, and to implement programs that fit this basic orientation - even if such programs contradict the interests of particular groups.2 In that sense, the success/failure of intervention, becomes in our argumenta tion, an empirical indicator of the relationship between state and civil society, and the extent to which the latter imposes constraints on the former.3 The additional requirement for a 2I develop this definition from several notions of autonomy available in political theory, which I elaborate in the second part of this chapter. 25 notion of autonomy to accommodate the reality of colonial power is that the State should be seen not only in relationship to classes but also in relation to other nations. As such, intervention in a typical post-Colonial situation is undertaken in order to mediate between the interests of foreign and domestic capital. This international dimension is typically the starting point of imperialist theories of development, which, according to many authors, threatened to shift the analysis from the basic premise of class exploitation to that of exploitation between nations (Warren 1976).4 This shift from inter-class to inter-State analysis is the beginning of the Dependency tradition in development writing. The earlier version of 3I use the terms "success" of intervention in the sense of the ability of the State to achieve what it had set out to do. Hence I avoid holding all states to some universal standard of "success*in terms of growth and/or development. More specifically, I use "success/failure" of intervention to mean the ability of the State to discipline private actors in pre designated ways so as to execute a chosen state agenda. In Chapter 3, I develop a very specific measure of the success of state intervention, in terms of unidirectionalism and reciprocity. 4The imperialist theories really mark the second phase in the debate on modernization which began in the fifties. The initiation of the debate was marked by a consensus amongst development economists that an active role of the state was called for. In the sixties and seventies, primarily through the contributions of Dependency writers, such an "active role of the state" was subjected to severe criticism. It was at this point that the theme of the state's developmental role was radicalized, i.e placed in the context of class analysis. The eighties and the nineties have seen a complete reversal of the radicalization, and is marked by the resurgence of a neo orthodoxy reminiscent of the pre-Keynesian years. Francis Fukayama's "End of History" is probably the most comprehensive philosophical statement of this resurgent neo-orthodoxy (Fukayama 1991). For a historiography of development theories see (Bardhan 1992; Evans 1992). 26 Dependency (known sometimes as the "vulgar" version) based itself squarely on such Leninist legacy. The later version consists in a theoretical attempt to integrate class analysis with the historical reality of colonialism. In so doing the later dependency writers develop a complex characterization of the post-Colonial State in terms of its relationship with specific social groups, as well as the world system. The primary thrust of the later dependency analysis is on class analysis, informed by the Poulantzian idea of the state as a condensation of class struggle. According to the earlier dependency writers, the exigencies of the process of capital accumulation and the international division of labor become the principal determinants of the nature of the peripheral State (Frank 1979). The peripheral State is created so as to serve the purposes of metropolitan capital, and as such must be in a position to control and direct the actions of all classes in the periphery, especially capital. The State's assumed role in development is therefore necessary to legitimize its contribution in the process of accumulation at the metropole (Saul 1979; Alavi 1972). In the case of Latin America, this necessity for legitimation have led to the creation of states that are "strong" in relation to civil society and in some instances, the local bourgeoisie, but "weak" or "dependent" in relation to the metropole. The problem with this argument is that it sees the 27 primary constraint on the peripheral State as being imposed by the global structure. The local structure is usually assumed to be indeterminate in colonized societies, caused by the relative weakness of the local bourgeoisie. This focus on the global structural constraint, which has been more true of the Latin American contexts than others, leads the earlier dependency writers to a shift analytical attention away from the class struggles within the peripheral State, and the limits to State autonomy imposed by the local structure. That these local limits to state autonomy may exist in a mutually reinforcing relationship with the global structure, a question which the earlier dependency writers ignore. Later dependency writers suggest two models of the peripheral State (Carnoy 1982). The first concerns a model of the accumulationist State, the emergence of which brings forth a new set of contradictions. While the primarily conflictual relationship between the State and capital prevail, a new symbiosis or alliance also emerges (Evans 1979;Palma 1978).5 As such, the relationship between capital and the State can be understood no more as simply conflictual or simply col- sDependent development is "not based on mere external exploitation but is rooted in the coincidences of interest between local dominant classes and international ones..". The most striking implication of this view is that dependent development unites the goal of foreign capital with that of indigenous industrialization:"The struggle for industrialization, which was previously seen as an anti- imperialist struggle, has become increasingly the goal of foreign capital. Thus dependency and development cease to be contradictory, and a path of dependent development becomes possible" (Palma 1978) 28 laborative. In the true Marxian tradition, they must be understood as a dialectic between conflict and collaboration between actors whose goals can be both similar and different, but cannot be pursued without entering into this alliance. As both the Latin American and East Asian cases have shown, such a dialectical relationship between State and capital can be sustained as the central social force only if the State also disciplines the popular sectors (Moon 1988:68-83; Evans 1987;1993; Deyo 1987).6 As some interpretations of the East Asian "success story" have suggested, the degree to which the nationalist-developmental state has been able to assert its autonomy has been a function of its relationship with capital, but no less a function of its ability to control the non-capital groups. In the context of Latin America, this in fact has led to the notion of bureaucratic-authoritarianism (BA), the second theoretical contribution of later dependency writing (O'Donnell 1979:292) . The rise of bureaucratic-authoritarianism can be seen as sThis is however an old theme in state theory, especially within the neo-Marxist and critical theory traditions. From Gramsci's concern with hegemony to Habermasian hypothesis of legitimation crises have all reflected the fundamental problem of the overextension of the state that comes as a necessary continuation of its interventionist power, and have become a central focus of theories of transformation in Eastern Europe. I will not address these issues directly but shall occasionally refer to them in order to explain our model of state autonomy in the context of development. 29 a response to the tension between accumulation and legitimation that is inherent in the peripheral state, especially where the peripheral states have shared with the capitalist class the project of industrialization based on monopolistic or oligopolistic accumulation. While on the one hand the State has actively created the conditions for such accumulation, it has also become increasingly dependent on such accumulation for the purposes of legitimation (Cardoso 1979). The contradiction arises partly because legitimation requires the availability of increasing amount of value (that can be distributed amongst the populist sectors)— for which the State becomes dependent on monopolies or transnationalized capital. It also derives out of the way in which the State aids the production of value; the process of "aiding accumulation" contradicts the various indirect measures of legitimation. Amongst these indirect measures, state policies towards labor are perhaps the most critical (Stepan 1978:76-7). Similarly important amongst the indirect measures that the State cannot pursue are those which seek to control monopoly and concentration of wealth (Chapter 4 and 5). It is in these situations, the bureaucratic-authoritar ian State— defined as the "guarantor and organizer of the class structure subordinated to the upper fractions of a highly oligopolized and transnationalized bourgeoisie", must emerge (O'Donnell 1979:292). Even in (formally) democratic societies, the reform program builds on a model of economic exclusion by shifting the broad populist base of legitimation to a narrower 30 one that focuses squarely on the urban upper middle class (Bardhan 1993). These attempts are similar to the ones discussed in the BA models (Stepan 1978; Cardoso & Faletto 1979), eventhough they may emerge in less authoritarian and less transnationalized societies. B. Conflictual Theories of Intervention In complete dissent with the dependency models, which explicate a collaborative relationship between state and capital, exists another class of neo-classical theories which assume a conflictual relationship between the two. An important approach within this school of thought is the new political economy of rent-seeking (Krueger 1974:291-303; Bhagwati 1982:988-1002; Srinivasan 1985:38-58; Colander 1984). It belongs to the neo-orthodox paradigm which epistemologically follows the interest groups or "elite” theory of politics associated with Vilfred Pareto, Hayek, Schumpeter, Friedman et al. The rent-seeking school proceeds from the claim that the only acceptable rationale behind state intervention is the correction of market failures. These market failures correspond to the problems identified by the early modernization theorists, i.e that of capital accumulation, export development and technological change (Rosenstein-Rodan 1945; Kuznetz 1955; Nurkse 1953). Once these failures are corrected, economic growth through private enterprise would be automatically 31 forthcoming. In other words, state intervention is valid only in the earlier stages of modernization and only if it creates conditions for the development of a private sector. As such, intervention should be directed toward the creation of a structure that progressively reduces the necessity of state intervention in the future. According to the rent-seeking approach, while the typical Third World state may have started out with a limited objective of corrective intervention, it soon encroached into other domains in order to mobilize electoral support. It does so by offering different bargains to different social groups, in exchange for which it hopes to obtain rents.1 It is this overextension of the state that seriously hurts entrepreneurship, since it makes commercial activity impossible unless a certain share of "rents” accrues to the State. The necessity to provide the State with these rents inflates production and transaction costs; it renders the private sector unable to compete internationally, creates aversions to risk- taking and forces upon it [the private sector] a technological seclusion that reinforces its lack of competitiveness and leaves it vulnerable to the attacks of foreign capital. There are several serious critiques of this argument and the policy implications that come with it. First, as I mentioned 7In the classical Ricardian sense, rent implies unearned incomes, which are generated simply through ownership of land. The modern idea of rent in my view, draws upon the same essential idea. The State is able to accumulate rents (i.e unearned incomes) only by virtue of 32 in Chapter 1, the rents generated through state intervention do not accrue to the state only. Rather it is distributed amongst the state, the bureaucracy, local capital, foreign capital and other dominant classes according to the distribution of power amongst them. Second, there is enough evidence that rent- seeking need not be practiced only by the State, but characterizes the behavior of any entity that operates within a context of unequal bargaining positions, deriving directly out of non-market power. The major example of this are oligopolistic transnational corporations (Amsden 1984), and landlords operating in 'inter-locked* markets of semi-feudal democracies (Bagchi 1985; Bhaduri 1984) etc. Finally, there is a deeper critique that the political implications of the rent-seeking argument lead to a denial of the State as the organizer of "development". They derive this redundancy of State intervention from the celebrated Coase theorem (Coase 1960). The political implication of ignoring the initial (or extant) distribution of property rights, as Coase suggests, is a very significant one; as I will argue, this initial distribution of property rights determine the very character and outcome of intervention. This determines in turn, how the retreat of the State, as advocated by the rent-seeking school, will affect the post-reform distributive configurations. The rise of the rent-seeking school symbolizes a change in the perception of the State from a solution to that of a 33 problem fEvans 1992). The new perception of the State rejects both ideas of the neo-classical laissez-faire State and the instrumentalist State. Rather, it sees the State as a central social entity that actively shapes classes and class struggle and mediates between them to fulfill its own goal of legitimacy. The extent to which it can acquire legitimacy depends on the autonomy it has to adopt and implement project that confer such legitimacy; its autonomy, as well as its legitimacy, in turn, is constrained at various levels, and is determined by specific structural and historical factors. ROLE OF THE STATE IN EAST ASIA The available literature usually points to two competing views about the nature of East Asian states— one that sees these States to have a limited, market-complementing role, and another, that sees the State to have a comprehensive developmental role (Wade 1990:15-18). The the market-conforming paradigm argues that the success of the NICs is based on the efficacy of free markets; in that sense, they see the role of the State as limited to the task of ensuring the conditions under which a free market could best operate (Bhagwati 1987).8 Such limited intervention, the 8Hugh Patrick for instance attributes Japan's economic performance to the efforts of private individuals responding to free markets for commodities and labor. Friedman in Free to Choose makes the same point on an even grander scale "Malaysia, Singapore, Korea, Taiwan, Hong Kong and Japan - relying 34 argument suggests, has prevented the creation of the rent-seek ing state; in other words, the typical East Asian state has been able to resist politicization process of accumulation. As such, economic decisions were taken according to the two major economic principles of marginal productivity and comparative advantage (Chenery 1961; Balassa 1981:16-17; Bhagwati 1986:83; Lai 1983:32; Krueger 1980:288-9; Ranis & Fei 1975 et al).9 As I pointed out earlier, the emphasis of this line of reasoning is to emphasize the separation of the economic from the political. By implication, this suggests that the politici zation of the problem of development, comprising the raisond'etre of the "interventionist" state has been the primary cause of development failure in most countries. Although these authors are not explicit on the question of autonomy, they imply that the rent-seeking state seeks excessive autonomy by artificially obstructing accumulation. In opposition to the above, exists the paradigm of the developmental State. In the broadest sense, the developmental State has been characterized as a "hard or soft authoritarian extensively on private markets - are thriving... By contrast, India, Indonesia and Communist China all relying heavily on central planning have experienced economic stagnation" (cited in Wade 1990). ’ Another variant of this FM argument is the Simulated Market (SM) theory that credits the Nic states for their ability to "simulate conditions that would produce the same results as in a free market economy". The theoretical thrust of the SM theory is in the analysis of the trade regime, and remains very much a variant of the neo-classical argument that links growth to self-adjusting markets. (Berger 1979:64; Saxonhouse 1985; Wade 1990:23). 35 State in corporatist relationships with the private sector, [which is] able to confer enough autonomy on a centralized bureaucracy for it to influence resource allocation in line with a long-term national interests" (Wade 1990:29). In Wade's conceptualization, several related structural characteristics thus define the developmental State. First is the ability to determine the basic orientation of development, freely of particular demands; usually this basic orientation has been reflected in a twin program of capital and technology accumulation. Second, the mode of legitimation is built into this twin approach: as technology is accumulated, labor acquires higher degrees of skill, thus being able to generate more economic value; so, while higher skills generate a demand for higher wages, the economy is also simultaneously rendered more capable of paying these higher ways. Through such a conduit of rising value and rising wages, labor in the developmental state is able to better its standard living continuously (Wade 1990:30).10 Third, in order to implement programs that fit the chosen model of accumulation and legitimation, the State intervenes extensively in the economy. Its interventionist strategies are executed by a bureaucracy 10 Wade ignores the problem of labor displacement in a context of continuous technological upgradation. This is however, somewhat understandable in the context of East Asia because of the small size and the relatively slow growth rate of population, and of course strict policies to prevent immigration. Wade's assertion would definitely become problematic if one were to consider countries outside of East Asia. 36 that is sufficiently insulated from political pressures (Johnson 1982, 1987, 1993; White 1988; Wade 1990; Haggard 1990). Finally, in order to ensure the efficacy of intervention, it has to engage in corporatist arrangements with factions of civil society as well. To maintain the stability of these arrangements over time, the developmental State has to be essentially authoritarian, although all states may not espouse "hard authoritarianism”. In the initial stages of its theorization, the paradigm remained exclusively tied to those elements of the developmental State which enabled the State to insulate itself from civil society (especially capital). A fundamental problem with this argument is that it needs clarify whether or not, the required degree of insulation comes from authoritarianism. In other words, can a democratic state be autonomous and effective in the sense of the developmental state? This problem of the Developmental State model, i.e., its incompatibility with a democratic polity, has been addressed, of late, in the concept of embedded autonomy (Evans 1992; Moon 1993). Embedded autonomy of the developmental State arises out of the numerous asymmetric channels of interaction and mediation with the different social groups that the State forges for itself, and uses the information obtained through these channels for the formation of social consensus (Moon 1993:3). This emphasis on consensus formation rather than sheer coercion, permits a certain generalizability of the developmental state 37 model to non-authoritarian states. Several historical reasons have been cited in order to explain the emergence of the developmental state vested with embedded autonomy. With respect to Korea, for example, it is often argued that the primary source of state power lay in a historical cojuncture that left no social classes strong enough to contest state power at the moment of state formation (Lim 1985; Amsden 1992). The landed class was eliminated through land reform at the time of the Korean war, and incipient political organizations of farmers and workers were also crushed as a part of Cold War politics (Cumins 1981). Second, it is argued that the Confucian tradition produced a society where the state commands "the moral high ground” (Leudde-Neurath 1985). Finally, the long tradition of centralization of power in Korean history helped reinforce the legitimacy of the authoritarian state. Contradicting these historical arguments, is another argument that attempt to explain state autonomy as an outcome of the state's actions (Kim 1987;Chang 1993). For example, the consolidation of power of the Economic Planning Board, the integration of budgeting and planning authorities and the finance and industry ministries are all seen as augmentation of state autonomy as a result of state actions. The problem with this argument lies in its causality. How does the State derive the autonomy to put in place the institutions in the first place? Do these institutions reflect 38 state autonomy or do they cause it? This could become a particularly intractable problem if one does not adequately take into account the historical conjectures.11 In contrast with countries like India, factors like destruction of the agrarian capital in East Asia has helped remove the strongest potential threat to a structural transformation from feudalism to industrial capitalism. Without this, the autonomy-enhancing institutions may nor have been posiible. Where such conscious destruction of agrarian capital did not occur, as in India, it still continues to impose limits on state autonomy not only by virtue of its own power, but also through the alliances it forms with industrial capital.12 With the onset of liberalization and the policies to promote agro-based exports, the power of agrarian capital has once again come to the fore. This underscores the importance of the other historical commonality between the developmental: the weakness or absence of the local bourgeoisie (Kim 1992). Thus the initial moment of the formation of developmental states is characterized by high degree of state autonomy since the capitalist class is not 11Having said that it is important to mention that structural-historical conditions need not necessarily include cultural or ethnographic arguments like the influence of Confucianism. For a discussion of how this influence was conditioned and "managed" to be conducive to the Togukawa regime's modernization program see Morishima (1977; Mukherjee 1992). 12A 1 s o by virtue of its extensive presence in the country side, dominates the rural poor, and is the force that circumvents the operation of public financial institutions, government banks etc. (Bhaduri 1984) 39 dominant, and the capitalist structure Itself is not articulated; moreover, the previously dominant landed class is annihilated. The bourgeoisie at this initial moment is weak, consisting of a small group of businessmen who have a history of dependence on the State. The primary constraint at this stage, therefore, is imposed by global capitalism (Hamilton 1982). It is under these initial conditions that state intervention, and the mechanisms of control are undertaken, and it is in this context that there efficacy needs to be judged. This weakness of the bourgeoisie and the resultant local structural autonomy makes for a critical difference between the developmental states like Korea and the other peripheral States. Korea's accumulationist role is not a mere reflection of the class interests it represented; it was the State's chosen development strategy, as well as its legitimation strategy. The fact that it had the requisite autonomy to choose its priority, design the appropriate institutions and subsequently invite the private sector to participate in the process of development, preempted the type of "alliance'' or collaboration with capital that emerged in some of the other peripheral States (India and Mexico for instance). As I will argue later, this inevitability of the alliance in countries like India has caused results so different from those in Korea, despite the similarity of policies, industrial structures and one-party dominated political regimes. 40 THEORIES OF INDIA’S FAILED DEVELOPMENT There are three basic approaches that attempt to explain India's development failure.13 The first consists the idea that critiques India's inward-oriented import-substituting devel opment strategy (Bhagwati 1988). Consonant with this critique, is the critique of central planning and the design of mixed economy (Bhagwati £ Srinivasan 1993; Bhagwati £ Desai 1970; Jalan 1992). The thrust of the critiques are essentially neo classical; they blame the non-performance of the economic apparatus on the inability to use market signals, both domestically and through free international trade. The state's resistance to using market signals is in turn explained by the "politicization of economic policy" as developed in the rent- seeking arguments. Some analysts go even a step further to explicate the relationship between "politicization" and the Indian state's commitments to democracy. The democratic process, it argues, has mobilized civil society to an extent well beyond the capacity of an "underdeveloped" economy. This discrepancy between an "underdeveloped economy" and an "overdeveloped state" 13 India's "failure" can be conceived of in different ways. In the specific context of intervention and liberalization, "failure" usually signifies the failure to develop competitive capitalism and consolidate its capitalist structure, a project that was undertaken by the State. A more serious failure lies in the deepening, rather than the removal, of poverty and the simultaneously increasing concentration of wealth. The pro reform neo-orthodox theorists see the two as related: competitive capitalism and export-oriented growth will generate its own trickle-down effect. Others see the possibility of disparities widening in the both the short and the long run, as a result of liberalization. 41 is taken to be the primary cause of development failure (Huntington 1968; Kohli 1990). The second approach to explaining development failure focuses on the State and the limits to its autonomy imposed by its relationship to social classes (Chattopadhyay 1972; Bagchi 1972;1993; Bardhan 1984). One group of analysts use this to concede to a Marxist-instrumentalist theory, where capital supposedly dictates the actions of the Indian State (Bambhri 1982). Another group of analysts subscribe to an Olson-type thesis that the State has "overextended" itself in order to accommodate demands of several groups who gained directly and indirectly from such an extension of the State apparatus (Bardhan 1984). I disagree with both these analyses in that they see the State as totally without autonomy with respect to social groups. The instrumentalist theories contradict the reality of intervention in states like India; it ignores the fact that the State has often been able to act autonomously to a certain extent, with respect to both labor and capital. The overextension thesis is somewhat contradictory in that it assumes that the State must respond whenever a groups asserts its demands. In this sense it has no autonomy. On the other hand, the thesis assumes that the State can respond to demands of whichever group they chose, without facing resistance from other groups with conflicting interests. In this sense, the State has total autonomy. 42 The third, and arguably, the most plausible thesis within, this paradigm asserts that the Indian state has performed exactly as a class state with limited autonomy and is faced with the typical tension between accumulation and legitimation that all class states face (Bagchi 1970, 1987, 1991,1993; Patnaik 1975, 1984, 1993; Kothari 1990; Mitra 1979). These authors are careful in underscoring the achievements of planning (or what they call state-assisted accumulation) in India. They contend that a basic infrastructure, both physical and social has been developed through the process of planning, including the development of at least a visible welfare apparatus, and a relatively high degree of autonomy with respect to transnational capital (Patnaik 1993; Kothari 1993). These elements have largely facilitated the cause of accumulation, the development of a strong private sector, and the concentration of economic and political power in the hands of a few conglomerates. It is this approach that seems most apposite to the analysis of interventionist states. However, even this approach ignores the starting point of intervention as one reflecting contradictions between colonial capital, a monopolistic, politically organized and nationalistic bourgeoisie, and a mass mobilized against both colonial and class rule as a result of the anti-imperialist struggle, out of which the Indian State itself was born. The emphasis of this approach is overtly on colonial power, and how that promotes unequal exchange (a la Emmanuel). As such, it cannot adequately explain the 43 contradiction of Indian intervention: that on the one hand, the Indian State could establish a formidable mechanism of control on capital; however, it could not inpose any of these controls effectively {Kaviraj 1988; Kurien 1987; Frankel 1978; Bettleheim 1974). THE TRAJECTORY OF STATE INTERVENTION: TOWARDS A THEORY For our purposes, I will define the State as comprising institutions of governance (the bureaucracy, the military, the judiciary and the legislative assemblies) and the system of order they enforce, either through coercion or appeals to legitimacy. This definition incorporates both the institutional and the political aspects of the State, as illustrated by authors like Giddens on the one hand, and Miliband on the other {Giddens 1985:17; Miliband 1969:54). In the context of modern states, the system of order must be legitimately imposed. Thus, autonomy, (defined in the broadest sense as the ability of the State to define its own course of action without excessive interference from the dominant classes), must be derived out of its legitimacy. In other words, the freedom/power of the State to act independently must be conferred on it by civil society. It is only then that projects autonomously chosen by the State can be implemented through the co-operation of the different groups comprising civil society. The State is (perfectly) autonomous when its decisions are not controlled by the interests of a particular class, i.e 44 that it is "self-interested", and can mediate between classes independently when conflicts of interest arise (Offe & Ronge 1975). The other Marxian extreme is that the State identifies with, protects, and serves the interest of the dominant classes, most often capital. In this view, the only reason why the State exists is because it functions as an instrument of the dominant class (Marx & Engels 1845-46). These two cases of perfect autonomy and perfect instrumentality are however theoretical extremities. The real State is usually somewhere in between these two; it is able to enjoy some degree of autonomy with respect to both dominant and subordinate classes. The idea of limited or constrained autonomy admits of both possibilities, i.e that the State does have a certain degree of autonomy in deciding the course of its own action; on the other hand, its autonomy is constrained by the necessity to obtain consent for its actions from both the dominated and the dominant classes (Engels 1959). The reason behind this lies in the need for legitimacy (Habermas 197 6; Offe 1984; Offe & Ronge 1975). It is this need for legitimacy that differentiates an authoritarian state from a non-authoritarian one. There are many different levels at which legitimacy can be defined (Beetham 1991). Given our definition of the State, legitimacy can be defined as the ability of the State to posit itself as an executor of projects that reflect shared beliefs (Beetham 1991:20). In the context of class societies, the 45 notion of sharing beliefs, and at a more fundamental level, the sharing of a normative system, becomes problematic unless the State refrains from articulating its class position. Thus, in the context of class societies, legitimacy requires the State to appear neutral between classes without actually being so (Offe 1973:127; Poulantzas (1978] (1980:136-155) .14 In order to project this appearance of neutrality, the State must simultaneously indulge in two contradictory activities: accumulation and legitimation (Offe 1973; O'Connor 1973). Legitimation comprises a complex of mechanisms through which the State legitimizes its aid to accumulation, in order to confirm its class neutrality. The most tangible and direct indices of legitimation constitute the typical redistributive measures of the welfare state. These reflect the State's ability to distribute the social product according to some justifiable norm (Offe 1984; O'Connor 1973:13; Habermas 1976).15 However, 14I will adopt here Carnoy's hypothesis that Offe’s characterization of the State under welfare capitalism is not as different from the formulation in the later works of Poulantzas. The principal difference here is that Offe concentrates more on the State's role in accumulation rather than in its role in formulating class relations. However, as Carnoy argues, since accumulation is fundamental to class relations and their reproduction, the two sets of theses are hardly as contradictory as they are made out to be (Carnoy 1984:147-52). lsAs Habermas explains, justifiable norms can be distin guished from norms "that merely stabilize relations of force". In so far as norms are "justifiable", they express generalizable interests and are presumably based on rational consensus. In so far as they do not express generalizable interests they are based on force. The difference distinguishes the pre modern/authoritarian State from the modern-democratic State. (Habermas 1976:111) 46 legitimation also consists of several indirect mechanisms, most notably, the efforts of the State to control and navigate the course of accumulation. But even when the State temporarily suspends the process of control, or when its attempts fail due to successful resistance from the dominant classes, the very fact that it establishes a political-administrative apparatus with an underlying objective to regulate capital, may actively aid the process of legitimation. The State also needs to ensure the continuity of accumulation for its own maintenance and the growth of the economy. In all non-socialist social formations, growth through accumulation must imply that the State aids the creation of surplus. As such, the State's actions to assist accumulation directly contradict the requirements of legitimation.16 On the other hand, the continuous generation of value at an increasing rate also becomes a precondition for fulfilling the needs of legitimation. Therefore, all non-socialist states become dependent on accumulation for the purpose of legitimation, as well as their own maintenance. In other words, while accumulation enables legitimation, accumulation also comes to represent the very opposite of legitimation. This dialectic 16"Because the reproduction of class societies is based on the privileged appropriation of socially produced wealth, all such societies must resolve the problem of distributing the surplus social product inequitably and yet legitimately" (Habermas 1976:96). 47 between accumulation and legitimation constitute the primary constraint within which States in all non-socialist social formations must operate (Offe 1984; O’Connor 1973). Intervention in this situation becomes a means by which the State attempts to resolve the contradiction between accumu lation and legitimation. Thus intervention may include at least the three following types of action to augment accumulation: (a) actions in order to constitute a structure of production, especially if the initial situation represents an indeterminate structure (b) market-complementing adaptations, and, (c) market-replacing actions in reaction to the weaknesses of the economic driving forces. Simultaneously, the State must undertake actions that compensate for the dysfunctional consequences of the accumulation process so as to prevent politically effective reactions from civil society. States seeking legitimacy (defined - as above - as the necessity to appear neutral) can obtain it only, and only so far as, they simultaneously fulfill functional gaps in the market, intervenes in the process of accumulation, and compensates for its politi cally intolerable consequences (Habermas 1976: 53-55). It is in this context that the question of autonomy becomes important. How does the State decide how to allocate its resources between accumulation and legitimation? This is determined by the degree to which its legitimacy is dependent on accumulation vis-i-vis legitimation, i.e to the interests of dominant and subordinate classes. 48 Depending on the relationship between State and civil society, the autonomy of the State might exist and be constrai ned in different ways. In general terms, the autonomy of the State is determined by the social formation within which it ex ists, the mode of production that dominates this formation, and the need to legitimate its existence within this mode. For our purposes, I need to distinguish between the following notions of autonomy and constraints on autonomy: Structural Autonomy: A State's structural autonomy is mani fested in the State's ability to pursue goals that are opposed to the interests of the dominant class(es), i.e transcend the structure within which it exists. The autonomy of the State is constrained in the structural sense if its actions need to preserve or reproduce the general structure of the social formations within which it to operate (Poulantzas 1976; Carnoy 1984:105-127). These structural constraints are strong or weak depending upon the degree to which the structure itself is determined; if the structure is indeterminate, and/or the position of the dominant class(es) within this structure is not wholly secure, the constraints on state autonomy are accordingly loosened. It is also necessary to distinguish between structural constraints on the autonomy of the State at the global and local levels. States operating within the same global capitalist structure may be differentially constrained by the global struc ture, depending on their financial, military and ideological 49 linkages to global capital. On the other hand, depending on how articulated the local structure is, the local constraints on autonomy may be relatively more binding for some states vis-a-vis the global structure. While operating within a given structure, the State might enjoy some relative autonomy to grant certain concessions to the subordinate classes that may even go against the temporary interests of the dominant class(es). These concessions cannot however, reflect any attempts to transcend, or even alter the structure itself (Poulantzas 1974:190-1). Instrumental Autonomy: A State's instrumental autonomy is manifested in its ability to operate freely of the direct or indirect influence of the dominant class(es) (Miliband 1969; Carnoy 105-127). Hence, the autonomy of the State is limited in an instrumental sense when the members of the dominant class influence the operations of the State through such means as membership of committees and advisory boards, campaign financing, lobbying, special relationships with regulatory bodies as well as linkages between members of the political and the economic elites (Hamilton 1982:9) A state may enjoy instrumental autonomy even when operating within the type of general structural constraint mentioned above. The State may have the autonomy to pursue its day-to-day activities without direct or indirect intervention from the dominant classes. This kind of instrumental autonomy 50 may be beneficial for the State to pursue the interests of the dominant class and reproduce its hegemony in a legitimate way. Bureaucratic Autonomy: A State's bureaucratic autonomy is said to exist when "those groups that staff the state apparatus are not recruited from the dominant class and do not form close ties with those classes after elevation to office" (Hamilton 1982:12; Trimberger 1978:4). However, this notion of autonomy really refers to the autonomy of the bureaucracy rather than the autonomy of the State. An autonomous bureaucracy must still act according to the project of the State which may be both instrumentally and structurally constrained. By itself, bureaucratic autonomy may enhance the instrumental autonomy of the state, but is in no way a sufficient condition for instrumental or structural autonomy. Embedded Autonomy: The idea of embedded state autonomy is developed by Evans, and comprises a dialectic between "embedded ness" and "autonomy". On the one hand, it implies the existence of intricate linkages between the State and the dominant class(es); these linkages however, do not erode the State's ability to insulate its decisions from the demands of these dominant classes, and pursue its own agenda. In that sense, a State's embedded autonomy is manifested in its ability to extract information and performance from the dominant classes simultaneously by virtue of its embeddedness in society and its insulation from private interests, but not from the decision- 51 making processes of the private groups.17 In fact, the autonomy of the State derives precisely from its embeddedness in these "private" decision-making processes. The preservation and constant assertion of state autonomy in this model, implies the ability of the State to invade and systematically encroach upon the autonomy of capital, without allowing capital to similarly invade its own autonomy. In order to have embedded autonomy, a State requires both bureaucratic autonomy and instrumental autonomy. No general hypotheses can be advanced as to the extent to which the State requires structural autonomy to attain embedded autonomy, or the extent to which embedded autonomy enables a State to transcend the structural constraints on its autonomy when the State attempts projects that contradict dominant class interests. These must be examined in the light of specific historical cases. In order to accommodate these differences, I suggest a distinction between "soft" and "hard" embeddedness. Soft embeddedness is of the type which prevents the State from deriving autonomy out of the linkages and networks that comprise the embeddedness; hard embeddedness, on the other hand, is the kind of embeddedness that enhance degrees of autonomy in the sense of Evans. In other words, soft embeddedness constrains, 17In this sense, it seems to have some overlaps with Offe's self-interested State, where the State's goal is distinct from the private goals, and in that sense the state is "insulated" from class demands. 52 while hard embeddedness advances state autonomy. Usually, every political-economic system is characterized by both types of embeddedness. Whether in a specific situation the hard elements can offset soft elements or vice-versa depends on the both the initial conditions and the dynamic character of the networks and linkages that comprise and shape embeddedness. Embedded autonomy may also exist, along with bureaucratic and instrumental autono my in a situation of structural constraints. However, the extent to which bureaucratic autonomy, instrumental autonomy or embedded autonomy exists despite structural constraints, depends also on whether the structural constraints are most binding at the local level or the global level. If the local structure is somewhat ambiguous, even though the global structure is well defined, then the State may have more room for maneuver vis-i-vis private interests. SUMMARY & CONCLUSIONS I proposed above a conceptual apparatus for explaining the evolution of particular outcomes of intervention in post colonial States. From this general theory I should be able to answer why interventionist regimes in different countries have been different, and produced such diverse results, when in fact the major instruments of intervention and the major institutions through which intervention was attempted have been quite similar between countries. I suggested that the essential difference comprises the constellation of relationships between the State, 53 capital, labor and the colonial powers. These relationships essentially involve the State in contradictions, which, along with the efforts of the State to resolve them, determine the outcome of intervention. I also suggested that the results of intervention as I see them today are results of a dialectical process of interactions between State and civil society. One needs to take account of this process, not only from the point at which intervention begins, but (at least) from the beginning of the colonial era. Hence, I proposed that one analyze the initial structure under which intervention is attempted. The methodological and theoretical point is however, not to take this structure as it appears at the moment of state formation, but to account for this structure by analyzing the relationships between colonial power, domestic capital, the (domestic) political elite and labor and the contradictions through which they have evolved. Such an analysis of relationships may then help us identify the constraints on state autonomy both at the formative moment of the State and throughout the interventionist period. It is through the identification of these constraints, some of which the State inherits, and some of which it "creates", that the particular outcome of intervention in a particular case can be explained. This explanation may then help us to understand 54 why the crisis of intervention occurs, why the consensus for liberalization emerges and from whom, and what specific content liberalization may come to possess. Let me conclude by adding one qualification with respect to my conceptualization of "constrained autonomy". Even though 1 use the notion for my analysis here, my findings do not completely agree with the image of the state suggested by the extant theories of constrained autonomy i.e., a state that genuinely attempts but cannot undertake (or implement) projects that would facilitate real structural change, especially if those projects tend to favor general instead of particular interests. My research seems to suggest the possibility of a aelf-aonstxained and self—reflexive State that may, at the point of state formation, enter voluntarily into a collaboration with certain factions of civil society, to implement a project that it finds the easiest to legitimate in its given context. In that sense, it is self-aonetrained because it strategically chooses to limit is autonomy in contain ways, in order to grain legitimacy in the long run. Such a State may have to become self-reflexive over time. By a self-reflexive State, I mean one that must consciously orient and re-orient its projects according as the initial (self-imposed) set of constraints consolidate or attenuate as intervention evolves. If the these constraints consolidate, the State has either to choose from a limited number of plausible projects, or develop new sets of institutions to weaken both the initial and the secondary set of 55 constraints that emerge. What emerges from this dynamic process, can by no means, be predicted a priori. I will elaborate on this discussion in the concluding chapter.18 10 I do not fully explicate the ideas of the self constrained and self-reflexive state, since they are not major elements of my argument here. I do introduce them to indicate my critique of the idea of constrained autonomy. 56 CHAPTER 3 THE EFFICACY OF INTERVENTION : KOREA VERSUS INDIA In this chapter, I will present the argument that while India and Korea have used many of the same instruments of intervention (as have many LDCs), intervention in India has been far less effective than in Korea. The key characteristic that determines the efficacy of intervention, I will argue, is the principle of reciprocity. Reciprocity implies that element of intervention where every effort of the state to augment accumulation is reciprocated by capital by fulfilling performance standards set by the State (Amsden 1989:146-150).1 By contrast, unidirectional intervention occurs where the State continues to augment accumulation even when capital consistently defies standards of behavior or performance set by the State. It also implies intervention where the State may choose to augment accumulation without requiring or specifying a priori, anything in return. l"The premise of late industrialization is a reciprocal re lationship between the state and the firm. This does not simply mean close cooperation, which is sometimes the way in which business-government relationship in Korea and Japan are simplistically depicted. Nor does it simply mean that times the government wields a stick and at other, unrelated times a carrot. It means that in direct exchange for subsidies the state exacts certain performance standards from firms. The more reciprocity that characterizes these countries, the higher the speed of economic growth" (Amsden 1989: 146). 57 This chapter will show how Korean intervention reflects reciprocity whereas in India, it has been unidirectional. I do this by comparing two mechanisms of intervention in both countries: that of industrial licensing and that of trade restrictions. In both cases, I show that the Korean state has been able to extract performance according to standards it set for firms. When standards were not met, assistance to accumulation has been systematically withdrawn. In India the case is to the contrary. The period of analysis extends over the interventionist phases in Korea and India. In Korea, the period roughly coincides 2 with the regime of Park Chung-Hee, between 1962 and 1980. In India, the interventionist phase extends over the entire plan period of 1950-1 through 1990, covering the regimes of Nehru, Indira Gandhi and Rajiv Gandhi, including the short regime of the Janata Dal. I also focus primarily on the interaction of the State with the largest section of corporate capital, since it is this faction that worked most closely with the State to decide the contours -of policy. The plan of the chapter is as follows. First, I present the general similarities of intervention in the two countries. Next, I compare the implementation of intervention in terms of two selected instruments : the industrial licensing mechanism and trade restrictions. The third and final section summarizes the 2I focus on this period because it is this period that is generally deemed to be the most interventionist as well as that of highest growth. After the end of this period, Korea has also started experimenting with liberalization (Moon 1988:1-3). 58 findings that lead up to my argument as to why the implementation of intervention has differed, which I take up in Chapter 4. GENERAL FRAMEWORK OF INTERVENTION Both in Korea and India, as in most LDCs, central planning undertaken under the aegis of the State emerged as the primary instrument of development. The similarity of this general characteristic can be assessed by comparing the plan objectives of the two countries (Chart 1A and IB). In both cases, poverty alleviation and self-reliance became the primary goals through 3 which the regimes claimed legitimacy. In both countries, a balance between agriculture and industry was chosen, although in reality, both countries gave special importance to industrialization. In both cases this emphasis becomes clearer in the Second Plan. In this program of modernization, accumulation was to play a key role. Given the general conditions of underdevelopment, it was also the case that in both countries the State would have to assist accumulation, through direct participation in production, the provision of incentives and the creation of a cautious relationship with foreign capital. 5In Korea, legitimacy of the regime was dependent entirely on its ability to fulfill these goals, since it had acquired power through an undemocratic, and hence illegitimate manner. In India, the regime had other resources to drew upon in order to secure legitimacy, of which democracy was politically the most important one. 59 At the same time that the State was to further accumulation, it also had the responsibility to ensure that accumulation helped accomplish specified national objectives. As such, the State had to monitor the process of accumulation. Intervention therefore was to assist accumulation, but only when capital agreed to behave in accordance with the national agenda and in ways specified by the State. The mechanisms of intervention were to ensure that this principle was strictly adhered to. Given these general objectives, the areas and the instruments through which the state in the two countries intervened were typical of the pattern of intervention adopted by most LDCs. They can be summarized as follows: 60 Chart: 2. Instruments of Intervention in Korea and India P r o b le m A r e a I n s t r u m e n t s o f I n t e r v e n t i o n I n a d e q u a t e I n f r a s t r u c t u r e P u b l i c p r o v i s i o n o f i n f r a s t r u c t u r e I n a d e q u a t e hum an c a p i t a l G o v e rn m e n t e d u c . i n s t i t u t i o n s ; s u b s i d i e s t o h i g h e r e d u c . , e s p e c i a l l y t e c h n i c a l a n d m a n a g e r i a l e d u c a t i o n I n a d e q u a t e d o m e s t i c f i n d i n g f o r l a r g e - s c a l e p r o j e c t s B o r r o w in g f r o m i n t e r n a t i o n a l s o u r c e s ; g o v e r n m e n t l o a n g u a r a n t e e s o n i n t e r n a t i o n a l l o a n s D i s t o r t i o n s i n t h e d o m e s t i c m a r k e t , i n d i c a t e d i n h i g h p r i c e a n d lo w o u t p u t o f p r o d u c t s L aw s a g a i n s t a n t i - c o m p e t i t i v e b e h a v i o r ( o n l y i n I n d i a ) s p e c i a l c a p i t a l c o n s t r a i n t s f o r s m a l l e n t r e p r e n e u r s i n t e r e s t r a t e r e g u l a t i o n ; s u b - s i d i z e d l e n d i n g c o n t r o l o n t h e d e g r e e o f e x t e r n a l d e p e n d e n c e s t r o n g i m p o r t c o n t r o l s ; e x p o r t - i m p o r t l i n k s y s t e m s n e e d s t o d e v e l o p s p e c i f i c s e c t o r s a c c o r d i n g t o n a t i o n a l p r i o r i t i e s ( t e c h n o l o g i c a l u p g r a d i n g , e m p lo y m e n t g e n e r a t i o n e t c . ) s e c t o r - s p e c i f i c s u b s i d y ; p r o t e c t i o n ; d i s c r i m i n a t i o n a g a i n s t s e c t o r s n o t a p p r o p r i a t e t o t h e n a t i o n a l a g e n d a Sources: Jones & Sakong 1980; Kim 1987; Haggard 1990 However, critical differences characterized the implementation of intervention in the two countries. Before taking up comparisons of specific mechanisms, it is necessary to mention some of the differences in the context within which intervention was attempted. In Korea, Park undertook very specific institutional innovations to enable successful disciplining of capital. The first was the organization of the four presidential secretariats of which two were exclusively concerned with economic decisions. They allowed Park to monitor economic operations on a daily basis. The second was the creation of the Economic Planning Board (EPB) in June 1961 (Haggard 1990:64) through which the budgetary and 61 4 planning powers were combined in the same ministry. In addition, the EPB also had control over foreign borrowing and direct investments, especially the screening and allocation of foreign loans amongst firms. The EPB's power was further consolidated by giving its head the rank of a deputy prime minister. The second important step was the nationalization of banks, which ensured that the allocation of credit could be completely controlled by the state. In place of the private commercial banks, two new financial institutions were created: a Medium Industry bank and the National Agricultural Cooperatives Federation. The military placed the Bank of Korea under the exclusive control of the Ministry of Finance. Operating on the recommendations of the EPB and the Ministry of Finance, the Bank of Korea was given the sole authority to allocate investment amongst the different sectors and different firms. The third important step, albeit at a more populist level, was Park's imprisonment of some of the leading businessmen of the day under the "Special Law for Dealing with Illicit Wealth Accumulation". They were later released by Park, and the threat to confiscate their property revoked in return for the pledge to "serve the nation through enterprise" (Chang 1989:148). In India, the situation with respect to the State's disciplinary abilities were quite to the contrary. Planners and other members of the political elite were very cautious to ^Interestingly, Haggard suggests that this drew upon the example of India. 62 preserve the autonomy of private capital as far as possible. S e c o n d , t h e P l a n n i n g C o m m i s s i o n , w h i c h w a s s e t u p f o r t h e e x p l i c i t task of designing controls on capital, itself was relegated to an a d v i s o r y s t a t u s b y t h e t i m e t h e f i n a l v e r s i o n o f t h e F i r s t P l a n was to be drafted (Frankel 1978:77). Third, every effort was made to merely "indicate principles of action" to the private sector, 6 rather than to rigorously dictate how it was to invest. In contrast to the Korean State's designation of exact sector in which private investment was to be allocated, the Indian planners merely excluded certain areas from private investment (albeit with qualifications). In Korea, since credit was wholly controlled by the State, it was impossible for the actual investments to go anywhere other than where the State intended them to be. By contrast, the Indian planners designated six areas where private investment could not take place. In Korea, every plan had its own designated sectors where investment was to be allocated, according as the planners perceived the growth potential for particular industries at particular points of time (See Chart 3). *"Progressively as our society grows, there is bound to be more and more nationalized industry - but ... there should not be an attempt to nationalize everything.. what you are aiming at is production and employment. If by taking a step you actually stop the production process from growing, this does not lead you to a socialistic pattern, although for some people that little step might be called socialistic", Speech of Prime Minister Nehru at the Lower House of Parliament, December 1954 (GOI 1989:2). *"It must be remembered that in the private sector, while the Government can influence, it cannot determine the actual course of investment. The programmers proposed are., therefore, in the nature of best judgements of what is feasible and desirable.." (GOI 1953: 186) . 63 C h a r t 3 : D e s i g n a t i o n o f P r i o r i t y S e c t o r s K o re a I n d i a I n d u s t r i a l P o l i c y R e s o l u t i o n , 19 4 8 s t a t e : d e f e n s e , r a i l w a y s a n d a i r w a y s , a t o m i c e n e r g y ; . c o a l , i r o n a n d s t e e l , s h i p b u i l d i n g , t e l e c o m , o i l r e f i n e r y p r i v a t e s e o t o r : a n y o t h e r i n d u s t r y F i r s t P l a n p r i v a t e s e c t o r : f e r t i l i z e r s , s y n t h e t i c f i b e r , c e m e n t S t a t e : e l e c t r i c i t y a n d o i l r e f i n i n g I n d u s t r i a l P o l i c y R e s o l u t i o n 195 6 S t a t e : d e f e n s e , r a i l w a y s a n d a i r t r a n s p o r t ; a t o m i c e n e r g y ; s t a t e m o n o p o ly o n f i v e i n d u s t r i e s d e s i g n a t e d i n t h e 194 8 r e s o l u t i o n r e v o k e d j o i n t s e o t o r : m a c h in e t o o l s , a n t i b i o t i c s a n d e s s e n t i a l d r u g s ; f e r t l i z e r s , s y n t h e t i c r u b b e r ; r o a d a n d s e a t r a n s p o r t p r i v a t e s e o t o r : a l l i n d u s t r i e s i n t h e j o i n t s e c t o r c a t e g o r y ; a n d a n y o t h e r i n d u s t r y t h a t i t c o n s i d e r e d v i a b l e S e c o n d P l a n s t e e l , n o n - f e r r o u s m e t a l s , h e a v y m a c h . p e t r o c h e m , e l e c t r o n i c s , a u t o m o b i l e I n d u s t r i a l P o l i c y S t a t e m e n t , 1 9 8 0 No s p e c i f i c p r i o r i t i z a t i o n T h i r d P l a n : h e a v y a n d c h e m i c a l i n d u s t r i e s S o u r c e : P l a n d o c u m e n ts , E c o n o m ic P l a n n i n g B o a r d , K o re a a n d G o v e rn m e n t o f I n d i a , v a r i o u s i s s u e s In India, the Government did not make recommendations for allocating investment to specific sectors as such. Instead, through the various Industrial Policy Resolutions, it sought to establish a particular division of labor between the public and the private sectors. So far there have been three such resolutions, in 1948, 1956 and 1980. Of these, the Resolution of 1956 was the most extensive, where two different types of industrial sectors were defined according as the degree of participation of the State and the private sector (Schedule A and Schedule B industries in Chart 3). Schedule A industries were to be "the exclusive monopoly of the State", Schedule B industries 64 were to be developed "jointly by the public and private sectors" and all other industries could be freely developed by the private sector (GOI 1989:32). The aim of this Resolutions were quite different than in Korea, where the sequencing of industries was undertaken specifically to maximize returns from investment. In India, the aim was much simpler : to reserve certain strategic sectors from the public sector. Two comments are in order in relation to the Policy Resolutions. First, the Resolution asserted the discretionary power of the State to allow the participation of the private sector in both Schedule A and Schedule B industries, should "national interests so require", except for atomic energy and arms and ammunition. It also asserted that extant private units in industries included in the two schedules would not be nationalized. Second, the industries reserved for the public sector were primarily those that had long gestation periods and were not compatible with the short-run interests of private accumulation, but were required to augment the infrastructure for private industry to be able to operate more profitably (Bagchi 1970:174). Thus the effect of "shutting out" private activity by the State was not necessarily inimical to accumulation as is often argued in the case of India. Keeping in mind these differences which set the context for intervention, I will discuss two mechanisms of intervention: 65 INDUSTRIAL LICENSING IN KOREA Both in Korea and India, an elaborate system of industrial licensing was developed, with the shared objective to monitor investment under conditions of capital constraint. In Korea, the underlying rationale was to avoid "excess competition" which would be inefficient both politically and economically. Political inefficiency would imply decentralization of decision making and hence, the potential weakening of state control on private action. This would inhibit the State's ability to coordinate investment activity to the extent it desired. Economic inefficiency would imply unregulated investment leading to overcapacity and waste of scarce capital (Chang 1987:149). Reciprocity was built into the licensing mechanism in two senses: an ex-ante sense whereby every effort would be made to ensure a priori that the projects would succeed, based on an elaborate review process. Second, reciprocity would also be ensured in an ex-post sense, whereby licenses would be revoked, and entire industries reorganized through state-led mergers. The ex-post measures of reciprocity were particularly important in eliminating unanticipated results of accumulation that might have been impossible to foresee in the ex-ante review. Also, like in most interventionist regimes, the ex-ante measures of reciprocity were sometimes compromised for purpose in addition to growth, most often for short term gains in legitimacy. In those cases, the ex- 66 post review would help to ensure whether the anticipated gains 7 from legitimacy were actually realized. In general, in the granting of a license there was a clear division within the political management according to size and strategic importance of the license being granted. Small projects were systematically reviewed in the lower strata of the bureaucracy, strictly in accordance with elaborate economic criterion based primarily on the projected cost-to-earnings ratio. Adherence to objective criteria in the case of these smaller, non chaebol projects was guaranteed by two things: (a) Park's "bureaucratic purification" drive where bureaucrats were reviewed yearly through a process conducted by Park himself; (b) the high cost to the non-chaebol firm of non-performance which would permanently disqualify it from any further assistance. This threat was continuously reinforced by the regime's disciplinary action with respect to the chaebol (Kim 1987:109-110). Third, reciprocity was ensured by enormously increasing the price of failure, and at the same time increasing the rewards from success. Since the licenses were central to successful accumulation, there was always an incentive for a non-chaebol firm 7In Korea, the primary criterion for selection was that a licensee would succeed. Beyond that, the criteria were not always objective and depended largely on the discretionary power of Park and his close associates. When several chaebols with equivalent track records competed intensely, the decision-making criteria differed, depending on the case. For example, the license for the Korea Fertilizer Company was given to Samsung, apparently because Samsung's chairman Lee had promised not only to build the largest plant for the lowest cost but also to complete it before the election. According to Park, this would have a direct positive effect on farmers, who at that time, made up the majority of the electorate. Such electoral victories were important to an authoritarian regime to ensure the critical minimum of legitimacy (Kim 1987:72). 67 to strive towards performance standards that would entitle it to special license. On the other hand, since it was immensely costly to lose a license, each chaebol firm strove to perform accordingly. Such integration of the issuing of a license to all the other sources of accumulation, particularly cheap credit and access to imported inputs in a regime of strong import control, was critical to the success of the licensing mechanism (Song 1990:137). One of the major ex-post means of ensuring reciprocity was the threat of withdrawal of support when inefficiencies occurred. This threat was made credible at various points of time. The Heavy and Chemical Industrialization (HCL) program was for instance prefaced by such an effort to correct inefficiencies characterizing the system. The inefficiencies were manifested in two occurrences: (a) the existence of widespread excess capacities in various industrial sectors; and (b) the increasing debt-equity ratios of even the largest and the most successful of the chaebol which put them in a situation of near bankruptcy. The State's response was also accordingly, two-pronged: first, to enforce a program of mergers and liquidation through which excess capacities, and when the need arose, entire lines of business of chaebol were eliminated and second, a state-designed financial restructuring program to save firms from bankruptcy. To implement the mergers the Korean state set up a task force accountable only to the Blue House. Between 1969 and 1972, numerous inefficient firms (exact numbers not released) were 68 forced into mergers, sales and liquidation. Four existing companies in the power-generating equipment industry were merged into the Heavy Industries and Construction Co. (KHIC), which was subsequently nationalized, on the ground that state support needed to make KHIC profitable was "too big to be given to a single private firm" (Chang 1992:112). In the passenger car industry, one of the three existing producers, KIA, was forced to exit, with the assurance that it could produce again when demand conditions picked up. Later, Daewoo was also forced to exit, while the two other dominant firms in the naval engine industry, Hyundai and Ssangyon were forced to split the market according to government instructions. In the heavy electrical machinery industry, three out of the existing eight industries were forced to merge into one and allowed to produce only a single high-price product with a quota fixed by the state. Each of the four companies in the electronics industry (Samsung, Goldstar, OPC and Daewoo) was forced to scale down its operations and specialize in one of four different products. Two companies in the copper smelting industry were merged by forcing one to buy the other's equity, which was supported by equity participation from KDB and a moratorium on loan repayment obligations (Chang 1992:113-4). In addition, the State designed a financial restructuring program, to be implemented by deoxee. While the decree saved most of the chaebol firms from going bankrupt, it 69 also contained severe restrictions on the financial behavior of s firms from that point on. In order to ensure that the chaebols actually behaved according to these directives, the Ministry of Finance prepared Measures on Bank Credit and Business Concentration. Business groups with outstanding credit of more than 5 billion won were put into two categories, according as their financial structure was weak or strong. Weak firms were specifically ordered to go public. They were prohibited from receiving new foreign loan guarantees, establishing/acquiring new businesses, investing in stock and acquiring non-operating real estate. In addition, the main companies of each chaebol were required to file a three year financial structure improvement schedule to reduce their debt-equity ratio by going public, increasing the stock of paid-up capital, and selling off subsidiaries to pay off debts, or by going into mergers (Kim 1987:109-11). Although the chaebol as a group was privileged with *The main contents of the August 29 Emergency Decree for Economic Stability and Growth were as follows 1. All loan agreements between business firms with a business license and lenders in the curb market as of August 2, 1972, were to be nullified and replaced by new ones. The borrowers would have to repay their informal loans within a five year period after a three year grace period, at a monthly interest rate of 1.35 per cent; alternatively, lenders would have the option of debt-equity swaps. 2. Some of the short-term loans of the firms were to be replaced by long-term loans. The amount of replacement was 200 billion won; 3. Establishment of a credit guarantee scheme for small and medium enterprises and in agriculture and fishing, amounting to 2 billion won. This would allow the banking system to make loans up to ten times the amount of fund (put up by the entrepreneur) without collateral; 4. Establishment of a rationalization fund, to which the state supplied 50bn won; it was to be used to lend to firms that could meet the state's criteria of rationalization standards. 70 respect to the non-chaebol firms, there was no way in which a particular chaebol could gain more privileges except for superior performance. This was secured by a continuous process of reorganization within and between chaebol. If a particular group was not able to perform in a particular line of business, it would have to move out of that area of production which would then be handed over to another group. This required a tremendous amount of flexibility in chaebol operation; indeed, in times of crisis, groups which were flexible enough to abide by the changing requirements of government policy were able to grow faster than the less flexible ones (Kim 1992:208-9). This has also fostered intense competition between the chaebol; unless a chaebol conducts its business efficiently, other chaebols can persuade the state that they can perform better and acquire an increased share of state support in the next round of allocations. This created a constant pressure on each chaebol to remain efficient, particularly because the state actually did disband existing chaebols on several occasions, seriously hampering their position in the hierarchy of the recipients of state patronage. INDUSTRIAL LICENSING IN INDIA In India, the Government had put in place an elaborate mechanism of Industrial Licensing under the Industrial Development Regulation Act of 1951. The goal of the licensing mechanism was two-fold (i) the optimum utilization of capacities and (ii) restricting concentration by restricting the "cornering of 71 capacities" (GOI 1956:1). In addition, a Monopoly and Restrictive Trade Practices Commission was also established in 1966, which along with the licensing system, was designated to prevent the growth of concentration. The (now abolished) Licensing system required investments above certain limits to obtain permission from the government. This "permit" would specify the list of items that could be produced by the unit and the maximum capacity of the plant. The license was granted after taking into account domestic demand (extant and future), existing capacity, foreign exchange requirements, the capital-output ratio, and other such "objective criterion". The licensing system used to be supplemented by a number of other controls relating to financing and capital issues. All capital issues required government approval; the Monopoly and Restrictive Trade Practices Act (MRTPA) further regulated the entry and expansion of large firms in new areas. The first important point with respect to the functioning of the licensing system and the regulatory mechanism in general is that almost no mechanisms of ensuring reciprocity in the export sense were ever implemented. This dependence on ex- ante measures prevented the correction of inefficiencies generated by these ex-ante measures. These, despite being extensive, suffered from the natural limitations of all ex-ante measures in general. Extensive and cumbersome review processes were designed to ensure reciprocity in the ex-ante sense. The review process 72 would determine levels of demand and existing capacity in the industry where a prospective firm sought entry, but it did not seek to determine whether the applicant would (a) install the licensed capacity and/or (b) utilize the capacity generated by the license. The review process did not take into account the track record of the applicant in utilizing the capacity it had been licensed so far. The inefficacy of the licensing system has been discussed by several committees set up periodically by the government until 1979, most of which have identified bureaucratic inefficiency and corruption as the as the main malady {GOI 1964, 1965, 1967, 1969, 1978 and 1987). Studies by independent researchers and research institutes, however, suggest that the system has been abused primarily by the large business houses rather than the small and medium firms, so that the failure of the licensing system has been directly related to increasing concentration in industry (Raj 1986; Paranjpe 1969). I cite below a study undertaken by an independent research institute in 1983 covering 3105 licenses obtained by the largest section 9 of the Indian corporate sector. As Table 1 shows, a large proportion of the capacity licensed was not even installed; on the other hand, for some firms installed capacity exceeded the level licensed. ’"Corporate Studies Group, Functioning of Industrial Licensing System: A Report", Indian Institute of Public Administration (mimeo), 1983. 73 Table 1: Distribution of Licenses according to Varying Levels of Installation Rang* of Installation {% of licensed Capacity) No. of licenses % of Total Licenses Zero 217 6.98 1 to 25 70 2.25 25 to 60 221 7.12 60 to 75 151 4.87 75 to 100 1827 58.84 100 + 619 19.94 Total 3105 100.00 Source: Corporate Studies Group, EPW, April 30, 1983, p. 696 Not only were licensed capacities often not installed, installed capacities were often not used for production (Table 2). For instance, as Table 2 shows, 40 per cent of the licenses obtained by the Associated Cement Company (ACC) were not utilized 10 at all (belong to the zero per cent utilization range). 1 0 Many of the Big Business houses and TNCs were not only violating licensing norms with regard to products reserves for the small scale sector, but also set up small scale units to take advantage of concessions and facilities meant for the small sector. For an account of the ways in which such benefits were being taken advantage of by the large sector, see: Nagaraji, H. "Some Aspects of Small Scale Industries in India, EPW, October 12 and 19, 1988. 74 Table 2. Diatxi.buti.on of Licenses Held by tbe top 20 Industrial Houaea Aooording to the Extent of Utilization (Production to Lieenaed) Name of Business House Zero % Util. Range 1-25 % Util. Range 25-60 % util. Range 60-100 % Util. Range Total no. of Licences Studied Birla 22.7 17.3 17.7 23. 6 220 Tata 28.8 20.1 25.8 15.7 198 Mafatlal 14.3 31.4 22.8 22.8 35 Singhania 20.0 28.6 17.1 20.0 35 Thapar 20. 9 16.3 20.9 25.6 43 Bangur 24.1 13.8 34.5 17.2 24 ICI 24.1 13.8 34.5 17.2 10 ACC 40.0 30.0 10.0 20.0 44 Shri Ram 25.0 25.0 6.8 29. 5 84 Kirloskar 22.6 42.9 21.4 10.7 13 Hindlever 0.0 30. 8 0.0 7.7 43 L&T 18.6 37.2 16.3 20.9 22 Modi 13.6 4.6 18.2 45.5 43 Chowgule 33.3 33.3 0.0 33.3 3 Source: Corporate Studies Group, EPW, April 30, 1983, p. 696 Simultaneously with the existence of unutilized capacities, firms have frequently over-utilized their capacities, which have then been endorsed under perceived requirements of economies of scale (See Table 3). The absence of reciprocity in this case is even more apparent. Not only have over-utilized licenses not been revoked, they have later been systematically reinstated through n capacity re-endorsement schemes. 11 Replies to Parliament Questions in 1983-84 provide details on capacity re-endorsement cases in the drug industry. Of the 37 cases involving bulk drugs, in 25 cases the reported re-endorsed capacity exceeded the then existing licensed capacity by over 100 per cent. Three companies, Organon India, Wyeth Labs and Searle Indian were allowed to regularize capacity for bulk drugs which was more than 1000 per cent over the licensed capacity. See Goyal S.K., "A Preliminary Survey of Excess Industrial Capacities with the Indian Corporate Sector", Corporate Studies Group Working Papers, volume I, 75 Table 3. Distribution of Licenses Utilized in Excess of Licenses Capacity According to the Licensee Category £ Level of Utilization % distribution of overutilized licenses Category 0-25 25-50 50-100 100+ MRTP Cos 61.5 67.7 50.0 56.3 Dominant Undertakings 24.7 16.9 14.3 9.4 Large Houses 73.6 76.9 66.7 71.9 Other Companies with foreign equity above 25% 8.8 12.3 7.1 4.7 Other Companies with 1 5 foreign equity bej^ow 25% 5.5 3.1 2.4 1.7 Joint Sector Cos. 3.8 1.5 0.0 4.7 Other Cos. 7.6 6.9 6.7 5.0 Source: same as above, p. 705. for an analysis of the capacity re-endorsement policy introduced in 1980. "companies required to register under the Monopolies £ Restrictive Trade Practices Act. These are companies which already have shown monopolistic behavior, or "are considered to potential threats to fair trade practices". “a "dominant Undertaking” as defined by the MRTP Act of 1969, is one that "by itself or along with interconnected undertakings produces, supplies or distributes or is otherwise connected with at least one-third of the total goods and services of any description produced, supplied and distributed or rendered in India (The MRTPA 1969 [1973]: 1) ""Large Houses" include "those business concerns over which a common authority holds power, and which in 1964 owned more than Rs. 5 crores in assets; large independent companies having assets more than Rs. 5 crores; and foreign companies and foreign subsidiaries (Report of the Industrial Licensing Policy Inquiry Committee ([Main Report]: 11-20). “"Other Companies" includes private corporations otherthan the categories defined in footnotes 13, 14 and 15. They are still houses in the large private corporate sector. “"Joint Sector Companies"are those in which the State has at least 51% equity holding. 76 Where then, was the emphasis of the review process? If it was not to ensure the optimization of capacity, would it be logical to conclude that it was more on the other declared objective, namely, to arrest the growth of concentration? Ensuring reciprocity in this case meant that entry or expansion of capacity of the applicant firm will not result in the firm acquiring more than a "fair share of the total capacity in the industry". Or alternatively, that it will not create a situation where future entry of firms will be jeopardized. The review process was thus supposed to have determined the existing share of the applicant firm in (a) the market for the product and (b) for the capacity of the industry. The major flaw in this review process was that it depended largely on data supplied by the applicants themselves. In case "no serious discrepancies in the data were found", the application is made public through the Ministry of Company Affairs Bulletin Board, so that objections from "the public", if any, could be taken account of. In most cases, existing license holders in the industry come forward to demonstrate how the granting of additional licenses will generate excess capacity leading to a waste of national resources. This objection by competing firms was bolstered by private lobbying at several The different licensee categories represent the various ways in which the government characterizes the large firms (for explanations see footnotes in Table). The Table shows that firms over-utilize their licenses from upto 25% over their licensed capacity to over 100% of their licensed capacity. Because of significant overlaps in the licensee categories, the numbers in columns do not add upto a 100. 77 levels of the ministry, and at times taken to the press for creating publicity against particular decisions of the ministry (Corporate Studies Group, op.cit; Kochanek 1989:190-210). In effect then, the licensing system helped in restricting entry, or at least disseminated information that would aid prospective competitors to collude in order to maintain an oligopolistic alliance. The generation of capacity therefore came to be based less and less on the criterion of optimum use of capacity, and more on the oligopolistic arrangement sought by several large firms operating in the same industry. This is reflected in a strong correlation between the degree of concentration in a particular industry and the existence of unutilized capacities (See Table 4 below). In other words, industries where a few oligopolistic players dominated were characterized by the extensive abuse of the industrial licensing system for purposes of restricting entry and maintaining the oligopolistic levels of output and profits. 78 Table 4. Concentration and Capacity In the Indian Corporate Sector, 1983 Industry Ranking in Ranking in Abused Concentration Capacity Man-made Fibre 1 1 Newsprint 1 1 Pig Iron 1 1 Jeeps 1 2 Motor Cycles 2 1 Cars 1 2 Three Wheelers 3 2 Malted Foods 2 2 Cigarettes 2 2 Commercial 3 4 Vehicles 3 3 Soaps 5 4 Boilers 5 5 Baby food 5 6 Industrial Yarn 5 6 Detergent 6 8 Cement 7 7 Industrial 7 8 Chemicals 8 9 Auto Components 9 10 Electrical machinery 9 11 Sources: Corporate Studies Group, op.cit; Mani 1992:m-87 RECIPROCITY AND TRADE There were primarily three mechanisms in Korea through which reciprocity in trade was endured. The first was through a straightforward enforcement of export quotas, under which firms had to export even when they thought it would hurt corporate 18 interests (Amsden 1989:69). State support to accumulation was "citing a study of Korean firms by Rhee, Ross-Larson, and Pursell (1984), Amsden shows that 53 per cent of the sample firms in 1976 reported negative effects of export quotas on their firms, 10 per cent said these targets had no effect and 37 per cent of the firms said they experienced positive effects. 79 made directly contingent on the fulfillment of these export quotas. Second, access to special promotional measures to augment accumulation were always made conditional upon export performance. Third, imports were allowed in an otherwise strong regime of import control by establishing export-import link systems (Jones & Sakong 1980). The creation of General Trading Companies (GTCs) as part of the aggressive export drive was one such measure. A. firm meeting certain minimum prerequisites was issued licenses to perform as a GTCs; by virtue of its GTC status, it was provided with export credit, import financing and the permission to joint international trade associations if considered necessary for promoting exports. Samsung was the first to be designated as a GTC in 1975. In subsequent periods twelve companies were granted the GTC status, of which three had their licenses revoked for not being able to meet performance standards (Kim 1987:164). Such cases of failure were few; in general the GTC achieved an export growth rate of 68.6% and were successful in meeting export quotas set roughly between 75 to 100 per cent of gross sales (Kim 1987:193, Table 4.18). For India, the primary instrument of trade control was that of import licensing. Till about 1978, the system of import licensing was undertaken for the specific purpose of protecting indigenous industry, particularly in the capital goods sector. This instrument of intervention, undertaken primarily to protect interests of capital, was one of the few successes of the interventionist mechanism in India. As Zable 5 shows, India had succeeded in steadily reducing the availability of certain imports 80 until 1978. As a result, the capital goods sector in India experienced commendable growth over the same period (Mundle 1990). Table 5. Import Availability ratios by Industry Groups __________Value of Imports as % of total availability_________ Industry Groups 1959-60 196S-66 1978-79 Food 4.2 2.9 9.4 Beverages 15.8 7.5 0.9 Tobacco 1.5 0.9 0.0 Textiles 2.9 1.3 1.6 Wood products 22.1 4.5 2.2 Furniture 0.9 0.4 0.1 Paper 23. 4 17.1 16.8 Leather & Fur 5.4 4.6 0.1 Rubber products 11.5 3.5 3.5 Chemical & prodts 30.2 17.2 16.0 Petroleum prodts 43. 9 27.8 32.5 Non-metallic minerals 6.5 2.2 29.3 Basic metals 32.3 22.2 18 . 9 Non-electrical mach. 65.8 56.3 31.4 Electrical machinery 38.1 27.2 9.7 Transport equipment 25.7 15.8 11.6 Miscellaneous 18.8 15.6 16.4 Source: Ahluwalia 1983. During the seventies a number of advisory committees were set up by the government at the request of the private sector (and headed usually by members of the private sector). They recommended a large-scale liberalization of capital goods imports in order to enhance competitiveness of exports. In addition, the committees suggested several fiscal and confessional measures to promote exports, particularly by large exporters (GOI 1978, 1984, 19 1985). A reciprocity-based export-promotion scheme, as in ”. However, neither the committees nor the government specified any mechanisms of ensuring reciprocity. To the contrary, some extant measures of ensuring ex-ante reciprocity were with-drawn. For instance, the policy to allow imports only to "actual users” was 81 Korea, would require that the number of import licenses issued to firms would be increasing only as export-to-sales ratios {or export/import ratios) of firms increased. The facts in relation to India's trade regime seem quite to the contrary. In accordance with the suggestions of the committees, the regime decided to liberalize imports. The Open General License (OGL), under which firms could import without prior permission from the government, was expanded with immediate effect - and has been expanded ever year between 1978-79 and 1991. The number of capital goods items under the OGL has also increased significantly (See Table 6). Table 6. Expansions of the OGL List: 1978-79 to 1991 Year Total no. of items No. of Capital Goods Items 1978-79 534 252 1979-80 702 385 1980-81 776 428 1883-84 959 539 1984-85 1055 653 1985-88 1185 850 1988-91 1274 944 Source: Ministry of Commerce, Govt, of India, Annual Reports various issues Over the same period the rupee value of import licenses 20 issued has also increased consistently (Table 7 below). liberalized. The share of licenses granted to actual users declined from 16.3 per cent to a 1 per cent between 1979 and 1990. On the other hand, imports by registered exporters grew from over the same period. As Table 7 also shows, the value of actual imports far exceeded the value of imports licensed. Is this merely the impact of an inefficient bureaucracy that was either corrupt or incapable of controlling violations by the corporate sector? It is difficult to answer this question in the affirmative. For as Table 5 implies, till 1978-79 (i.e. when imports were liberalized due to pressures from capital), imports could be controlled very efficiently, resulting in 82 Table 7. Actual Imports and Impost Licensea Issued, 1979-1990 (Values in Rs. Croces) Year Value of Value of <ClxC2)/C actual licences 1 imports issued 1979-80 9143 4206 46.0 1980-81 12549 5340 2.55 1981-82 13608 7755 56. 99 1982-83 14293 7166 50.14 1983-84 15832 7030 44 . 40 1984-85 17134 8255 48.18 1985-86 19658 8417 42. 82 1986-87 20096 9213 45.85 1987-88 22399 10415 46.50 1988-89 28194 14397 48.94 1989-90 35412 18634 53.00 Source: The Ministry of Commerce Annual Reports, Government of India, various issues. Along with the increasing inport allowances for registered exporters, most of who were large firms, a system of export credit and export subsidy was adopted. However, none of these incentives were matched by any export requirements, i.e no conditions to ensure reciprocity in the ex-ante sense were specified. There was however, a general expectation that firms would become increasingly export-oriented and that their export- to-sales ratio would increase leading to net additions in the foreign exchange inflow of the country. As in the case of licensing, reciprocity was not executed even in the ex-post sense. Even when the corporate sector, especially its largest section. a steady decline of imports in sectors that the regime chose to protect. 83 failed to register export increases, and in fact continuously recorded negative net earnings of foreign exchange, the State did not withdraw export subsidies. In fact, in certain instances, they were extended or reinforced. Table 8 below shows that the largest faction of the Indian corporate sector recorded a steady decline in the export- intensity over the period 1976-84. Table 8. Distribution of Companies According to Escort Intensity, (1976-84) Percentage Range of No. of Companies in No. of Companies Export Intensity4 1975-76 in 1983-84 (2) (3) (4) 0 108 135 0 - 25 110 144 2.5 - 5.0 55 43 5.0 - 10.0 65 47 10.0 - 15.0 19 10 15.0 - 25.0 28 • 15 25.0 - 40.0 9 2 40.0 - 50.0 1 3 50.0 and above 5 1 total 400 400 Source: ISID Corporate Data Base (Based on an analysis of the foreign exchange utilization data of companies having paid-up capital of Rs. 1.00 crore or more in 1983-84. a* Export-intensity is defined as the export-import ratio. An even more revealing picture can be obtained from the trends in export-intensity and the net earnings of the 405 largest firms in India. The continuation of import liberalization appears even more incongruent when one considers the rise in negative net earnings of the large private sector (See Table 9). 84 Table 9. Foreign-exchange Earnings and expenditure Pattern of 405 Companies (values in Rs crores) Year Earnings Expenditure Net Earnings 1975 512.30 419.25 93.05 1976 717.24 472.73 n/a 1977 705.93 622.62 83.31 1978 680.63 748.65 -68.02 1979 744.38 973.51 -229.13 1980 848.92 1093.32 -244.40 1981 1031.27 1378.27 -347.00 1982 1105.42 1537.89 -432.47 1983 998.02 1459.33 -461.30 Source: As Table 8 above The trend in negative net earnings is similarly borne out when I consider the top twenty business houses. Of the several trading companies owned by the top twenty business houses, some were given the status of Export Houses (EH) and Trading Houses (TH) (in line with the Korean GTCs), according to the volume of exports generated by them. Special confessional measures, especially tax breaks were made available to them in addition to the ones already available to the large sector firms undertaking exports. As I see in Table 10 below, the 131 trading companies owned by the top twenty houses also showed declining export intensity over the period. Export Houses and/or Trading Houses did little to offset the negative net earnings generated by Business Houses as a whole. 85 Table 10. Export Orientation of 131 Conpaniai Belonging to the Top Twenty Industrial Houses Y e a r E x p o r t s (in Rs. crores) S a l e s (in Rs. crores) B/S (Export/sales ratio) 1975-76 266.31 3776.23 7.05 1976-77 378.11 4273.00 8.85 1977-78 368.81 4634.05 7.96 1978-79 355.54 5219.57 6.81 1979-80 382.00 6027.74 6.34 1980-81 435.88 7127.05 6.12 1981-82 562.58 8911.61 6.31 1982-83 548.55 9817.93 5.59 1983-84 463.66 10815.21 4.29 Source: As Table 8 above As such, the net effect of the Business House's export performance on the country's foreign exchange earnings were negative (Table 11). Table 11. Net Earnings of 131 Companies Belonging to the Top Twenty Industrial Bouses (in Rupees Crores) Year As reported by 23 Export Houses & Trading Houses As reported by 108 other Cos. Net Earnings of 131 Cos. 1975-76 103.11 -16.20 86.91 1976-77 145.68 39.58 185.25 1977-78 130.67 -15.32 115.35 1978-79 123.13 -75.96 47.18 1979-80 135.98 -162.33 -26.35 1980-81 137.41 -160.28 -22.87 1981-82 150.08 -252.59 -102.51 1982-83 111.44 -289.15 -177.70 1983-84 114.72 -320.86 -206.14 Source: As Table 8 above However, as I mentioned above, the State’s support to exports increased over this period, shown in the rise of both 86 export subsidies and export credit over the same period (Table 12) . Table 12. State Suppoct to Exports, 1978-79 to 1991 - Year Explicit Subsidies (Rs.billion at current prices) Export Credit (Rs.billion, change during year) 1980-81 3.99 0.09 1983-84 4.63 3.15 1984-85 5.18 2.94 1985-86 6.03 0.74 1986-87 7.85 7.37 1987-88 9.62 7.71 1988-89 13.86 • 22.24 1989-90 20.89 21.04 1990-91 27.00 n/a Source: World Bank 1992: 152 and 165. SUMMARY AND CONCLUSIONS In the above I tried to explicate the difference between intervention in India and Korea, focusing on the principle of reciprocity. I saw that in Korea, intervention could ensure that state measures to augment accumulation were reciprocated by capital through the latter's adherence to performance requirements set by the State. In the case where capital failed to do so, state support was withdrawn. In India, support was not withdrawn when capital could not (or did not) fulfill the expectations of the State. This difference seems even greater in the light of the fact that both countries had undertaken some of the same institutional innovations to control capital, namely, central planning, industrial licensing, public control of credit etc.; in fact, the Indian State put in place extensive legislations to 87 orient the behavior of capital according to "national objectives" of equity and growth. How can one explain this difference in the ability of the state to enforce reciprocity? I suggest that the answer lies in the degree of autonomy enjoyed by the state. Under conditions of constrained autonomy, intervention succeeds in its goal of directing accumulation in any designated manner. By contrast, an autonomous (or developmental) State can not only succeed in augmenting accumulation, it can also ensure that accumulation occurs in a manner that conforms to the national agenda. As the contrast between Korea and India illustrates, whether or not a State's autonomy is constrained depends to a great extent on the historical situation under which the State is formed. It is to these arguments that I turn now. Table 1A: Goal* of Planning- in Korea: 1961-1980 88 Plan General Goals Specific Objectives First Plan (1962-1966) "construction of the basic structure for a self-reliant economy by terminating the previous aid-dependent and con sumption-oriented structure and vicious social and economic circle" 1. development of the farm sector and correction of the structural imbalance; 2. development of a stable energy supply 3. development of basic industries and infrastructure; 4. utilization of idle resources, especiallylabor and land; 5. improvement of BOP through ISI and export promotion; 6. development of technology Second Plan (1967-1971) "modernization of the industry structure and a further promotion of the self-reliant economy” 1. self-sufficiency of food; 2. doubling of the manufacturing capacity with special emphasis on chemical, steel and machinery industries; 3. and efficient BOP strategy through both ISI and export promo tion; 4. increase of national income by 10% with special emphasis on the agricultural sector; 5. enhance productivity through better and subsidized education. Third Plan (1972-1976) "simultaneous achievement of growth, balance and stability; construction of self-reliance; inter regional balance” 1. reformative devel opment of agriculture and fishery sector; 2. aggressive export drive; 3. HCI initiative Fourth Plan (1977-1981) "realization of a self- reliant growth struc ture; social develop ment; promotion of technological innovation and efficiency" S o u r c e : Jones £ Sakong 1980, op.clt. 89 Table IB: Goals of Planning’ In India (1951-1990) Plan General Goals Specific Objective First Plan (1950-51 to 1955-56) "the central objective of planning in India is to rise the standard of living of the people .. our program is twofold.. leading at once to increased pro ductivity and reduction of inequalities" 1. topmost priority to agriculture 2. raise stock of physical capital through public outlay 3. increase the rate of savings and thereby, the rate of investment Second Plan (1955-56 to 1960-61) "rapid growth by in creasing the scope of the public sector; basic heavy industrial ization; to increase the production of con sumer goods both in the large factory sector as well as the small sector; to provide social services; and to create a more equitable distribu tion of income" 1. increase in national income by 5% per year; 2. extensive heavy in dustrialization; 3. the creation of 11 million jobs Third Plan (1960-61 to 1965-66) "raising the living standards of people by taking advantage of the gains in industrializa tion made so far” key role to agriculture Fourth Plan "exclusive emphasis on rural development, with a renewed effort to achieve self-reliance" key role to agricultural infrastructure develop ment; increased control over MNCs and foreign capital Fifth Plan (1978-79 to 1983-84) "creation of full employ ment, eradication of poverty and the promo tion of a more equal society" provision of basic needs to the majority of the populace Sixth Plan (1983-84 to 1988-89) "a progressive reduction in the incidence of poverty" Souroe: Government of India, Plan Documents, various issues 90 CHAPTER 4 STATE AND CAPITAL IN INDIA: INTERVENTION AT THE MOMENT OF STATE FORMATION INTRODUCTION In Chapter 3, I presented the argument that the imple mentation of intervention has differed significantly between South Korea and in India, in the specific sense of South Korean intervention being characterized by reciprocity, and Indian intervention, by unidirectionalism. Our purpose in this chapter is to argue that this difference in the State's approach to intervention implies differing degrees of autonomy enjoyed by the State. Reciprocity is possible only when the state enjoys a significant degree, and particular kinds, of autonomy which are specific outcomes of historical processes. Since state autonomy is generally defined in terms of the relationship of the State to civil society, it is ultimately this relationship that determines the nature of intervention. I suggest that arguments that attempt to explain the nature of intervention (and its effect on development) by taking bureau cratic efficiency as the major explanatory variable, are inade quate. The experience of successful developmentalism, as in East Asia, suggests that the importance of bureaucratic efficiency exists only in the context of a developmental State, where the developmental State is distinguished by a particular kind of State autonomy. It is this relationship that enables the bureaucracy to act in a certain way. The success of the Indian bureaucracy in implementing certain projects vis-a-vis 91 others suggests the need to reconsider arguments offered by the rent-seeking school, or the institutionalists, which focus squarely on the nature of the bureaucracy. With these considerations in mind, our thesis here will be that unidirectional intervention in India is a product of the various constraints on the autonomy of the State. Using the various ways in which state autonomy and its constraints can be conceptualized (see Chapter 2), I will link unidirectionalism with limited state autonomy as follows. Unidirectional intervention, as I discussed in Chapter 3, occurs when the State augments accumulation without forcing capital to act in pre designated ways. While the State may suggest or expect capital to behave in certain ways, and may even make certain threats in the case of non-compliance (by capital), it [the State] does not translate those threats into action by discontinuing its support to accumulation. This failure to "discipline" capital occurs in a fairly systematic manner, and cannot be corrected even when the institutional or bureaucratic means (in terms of laws, regulations etc.) exist. This is because intervention is initiated in a situation in which there exists constraints on state autonomy, primarily in the form of contradictory demands for accumulation and legitimation.1 This contradiction is reflected in the 1 As I suggested at the end of Chapter 2, the case is actually more complex than that. In the Indian case, the State does choose to be self-constrained, and over time, self reflexive. 92 mechanism of intervention that are developed. In the Indian case, for example, the contradiction is reflected in intervention to control accumulation in some serious ways, at the same time that intervention also assists accumulation significantly. As such, as intervention proceeds over time, it helps strengthen these initial constraints by aiding the consolidation of capital, while at the same time intervention may also bring about a certain (at least institutional) expansion of the State. Because of the innumerable possibilities this dynamics may unleash, it cannot be postulated a priori that such an expansion will enable the State to actually discipline capital, in the sense of enforcing reciprocity.2 A high degree of democratic mobilization amongst the 'popular' sectors of civil society may increase the state's disciplinary abilities. On the other hand, growing economic inequality may in a continuous amorphization of the popular sectors and may tighten the nexus between state and capital. In what follows, I will develop this relationship between constrained autonomy and unidirectionalism as it exists in India. First, I will discuss the historical origin of the constraints on the autonomy of the Indian state. I will do this by characterizing the major actors involved in the policy debates immediately surrounding the Transfer of Power in 1947: 2In the case of India, one needs to note the difference in the ability of the State to establish (through legislation) mechanisms for controlling capital, and the ability of the State to actually enforce these. I demonstrate this difference by taking the example of anti-monopoly legislation (see below). 93 namely, the State and capital with their various factions and their linkages to social groups. This discussion of the social configuration at the moment of state formation will be important in explaining the context within which intervention is under taken.3 To further explicate this context, I will identify the major areas of agreement and disagreement between state and capital as it existed at the moment of state formation. Finally, I will draw upon the previous sections to characterize the nature of intervention at the point of its initiation in terms of the notions of autonomy that I have developed. This will take us to our next chapter, where, drawing upon the example of two objectives of intervention, (viz. the State's control of credit and its attempts to curtail monopolistic growth), I discuss how these constraints actually necessitate unidirectionalism (and prevent reciprocity) in a dynamic sense. Before going into this discussion, let us briefly recapitulate theoretical discussion on autonomy that 1 developed in Chapter 2. First, I defined a State's structural autonomy as the State's ability to pursue goals that are opposed to the 3By the term "the moment of State formation", I mean the time period adjacent to the Transfer of Power in 1947 - both prior to and after it. For the period prior to 1947, I take the thirties as the initiation of the State formation process. By this time the leaders of the bourgeoisie and the political elite, as well as their respective factions and agendas have become clearly identifiable. For the period after 1947, I take the "formative" stage of the State to continue upto 1955. A consolidation of the state apparatus can be observed from 1955, when for the first time a formally drawn up Plan, formulated through the Planning Commission is adopted. 94 interests of the dominant groups, i.e transcend the structure within which it exists. While operating within a given structure, the State might enjoy some relative autonomy to grant certain concessions to the subordinate classes that may even go against the temporary interests of the dominant class(es). These concessions cannot reflect any attempts to transcend, or even alter the structure itself (Poulantzas 1974:190-1). Second, I defined a State's instrumental autonomy as its ability to operate freely of the direct or indirect influence of the dominant class(es) (Miliband 1969; Carnoy 105-127). Hence, the autonomy of the State is limited in an instrumental sense when the members of the dominant class influence the operations of the State through such means as membership of committees and advisory boards, campaign financing, lobbying, special relationships with regulatory bodies as well as linkages between members of the political and the economic elites (Hamilton 1982:9). A state may enjoy instrumental autonomy even when operating within the type of general structural constraint mentioned above. Third, a State's bureaucratic autonomy was said to exist when "those groups that staff the state apparatus are not recruited from the dominant class and do not form close ties with those classes after elevation to office” (Hamilton 1982:12; Trimberger 1978:4). However, this notion of autonomy really refers to the autonomy of the Jbuxeaucracy rather than the 95 autonomy of the State. An autonomous bureaucracy must still act according to the project of the State which may be both instrumentally and structurally constrained. By itself, bureaucratic autonomy may enhance the instrumental autonomy of the state. Finally, I discussed the idea of embedded state autonomy as developed by Evans. As I discussed it, embedded autonomy comprises a dialectic between "embeddedness" and "autonomy". In Evans' sense, a state's embedded autonomy is manifested in its ability to extract information and performance from the dominant classes simultaneously by virtue of its embeddedness in society and its insulation from private interests, but not from the decision-making processes of the private groups.4 In fact, the autonomy of the State derives precisely from its embeddedness in these "private" decision-making processes. In order to accommodate differences in the character of embeddedness, I suggested a distinction between "soft” and "hard" embeddededness. Soft embeddedness is of the type which prevents the State from deriving autonomy out of the linkages and networks that comprise the embeddedness; hard embeddedness, on the other hand, is the kind of embeddedness that enhance degrees of autonomy in the sense of Evans. In other words, soft embeddedness constrains, while hard embeddedness advances state 4In thia sense, it seems to have some overlaps with offe's self-interested State, where the State’s goal is distinct from the private goals, and in that sense the state is "insulated" from class demands. 96 autonomy. Usually, every political-economic system is characterized by both types of embeddedness. Whether in a specific situation the hard elements can offset soft elements or vice-versa depends on the both the initial conditions and the dynamic character of the networks and linkages that comprise and shape embeddedness. Embedded autonomy may also exist, along with bureaucratic and instrumental autonomy, in a situation of structural constraints. As I mentioned at the outset, our theoretical presupposition in this work is that the possibilities of all types of autonomy are limited (or enhanced) by given structural characteristics; these characteristics emerge as structural constraints if and only if the State attempts to transcend the structure by acting in opposition to the interests of the dominant classes. A set of such structural constraints is manifest in the initial conditions under which intervention is undertaken. It is worth emphasizing however, that a developmental state (as typified by South Korea) enjoys high degrees of instrumental, embedded and bureaucratic autonomy. Its initial moment is characterized by a high degree of structural autonomy with respect to the local structure, although it works within the constraints of global capitalism. HISTORICAL ORIGINS OF CONSTRAINTS ON STATE AUTONOMY IN INDIA: FACTIONS WITHIN THE STATE On the eve of State formation the Congress Party (which has controlled the Government from 1947 to the present) was comprised of at least three factions. One was a conservative nationalist faction which saw private enter prise as the basic instrument of development but which also saw the necessity for state involvement, primarily for pro tection and the development of industrial infrastructure. The second was a moderate faction which regarded economic planning as an essential instrument of economic transformation in India. This group conceived of state involvement as critical for improving distribution rather than a change in the organization of production. The third group consisted of those radical planners and social scien tists who saw planning as an instrument of gradual political evolution toward a socialist state. For this group, the expansion of the public sector in and of itself, implied steps in this transformation (Bagchi 1991:611). Each of these factions, in turn, were linked in different degrees to different classes and groups in society. The conservative faction was most closely linked to the largest faction of the industrial bourgeoisie, and shared the common project of appropriating the resources of the State for capitalist development. The linkage of this conservative faction to the agricultural population, both its rich and the poor factions, was rather weak (Kochanek 1974:274-6). The moderate faction was most strongly linked to the urban and educated upper middle-classes, and the self-employed professionals (Mukherjee & Mukherjee 1988:532-4). The radical* consisted of two groups. One group consisted mostly of intellectuals and idealists from the upper and middle- classes, who claimed to represent the urban and agrarian poor. Not surprisingly, this group suffered from the usual deficiencies of a "vanguard" intellectual entity working on behalf of a weaker class. The second group (amongst the radicals) comprised very small, first-generation entrepre neurs who saw indigenous enterprise as an intrinsic element of both nationalist as well as socialist development (Gupta 1988:76-9). These factions within the Congress Party, with their respective patterns of social linkages, suggested different trajectories of action once the post-colonial State was formed. Accordingly, they envisioned different roles for the State. The conservative trajectory was to transform the extant feudal agrarian system into a modern capitalist industrial economy with high rates of growth. These goals were articulated in the famous Bombay Plan of 1944 (Thakur- das,P, Tata J.R.D, Shroff A.D, Birla G.D et al:1944) which was a memorandum authored by the leading industrialists of the day. The Plan, while accepting and, in fact, advocating state participation in the economy by transferring resources from farm to industry and by allocating all public resources to large scale capital-intensive industry, suggested a strategy for doubling the output of the economy in the first 99 five years of planning {Thakurdas et al, op.cit:23; Adeshiah:1985:40-7). In that sense, the conservative trajectory was similar to the Korean approach to planning especially in its exclusive concern for growth {see Chapter 3) . The moderates placed emphasis on the State's role in distribution, and in that sense, their vision was one of "development" rather than "growth".5 While they also saw industrial expansion as the primary strategy, the moderates envisaged the State's role to be more than merely a supplier of infrastructure for private enterprise and of minimal social services. They saw state participation in the economy as essential for capital formation - both human and physical -and technological development, which they held to be the cornerstones of development (Deshmukh 1957). The radicals at this time were looking far beyond both growth and development. This group, consisting of members of the Congress Socialist Party who worked in close association with the Communist Party of India, had gained considerably in strength due to the extensive mobilization of 5The idea of "development” versus "growth" have been and continue to be at the center of the development debate. Broadly speaking, growth implies a sustained increase in the volume of output and income of a society over time. This notion is not concerned with the distributive implications of income expansion. Development on the other hand, is a more comprehensive notion, comprising growth, distribution, and a general increase in the standard of living of all classes, especially the weaker ones (Myrdal 1957; Chapter 2) 100 Industrial workers and the agrarian poor (Frankel 1978:64- 70). Partly because of its association with the Communist Party, and partly because of the violent tendencies inherent in grass-roots mobilization in a situation of gross inequities, the movements led by the radical faction were becoming increasingly violent. This brought tremendous opposition from Gandhi, not only because it went against his principles of non-violence, but also because of his opposition to a communist alternative. Gandhi's opposition was shared by the conservative faction, and was successful in significantly moderating Jawaharlal Nehru's committed socialist stance, even though it could not reduce the strength of the radical faction as a whole (Frankel 1978:65). The strength of this radical faction, and Nehru's commitment to it, were reinforced immediately after Independence when Nehru, "in a striking departure from Gandhi's strategy - and his own earlier prudence - permitted a radical formulation of the Congress Party's ultimate goals.." (Frankel 1978:68). The Committee on Objectives and Economic Programs passed a resolution that provided for substantial land reforms, nationalization of existing private enterprise (particularly monopolies) and the establishment of heavy industries under public ownership. In addition, the Committee envisaged that the State would exercise substantial control on the functioning of private enterprise (Frankel 1978:68). The configuration of the various factions within the Congress Party and their social linkages as they existed at the eve of Independence can be summarized as follow Figure 4.1. Pactions within the Congress Party and their social Linkages at the Eva of Independence S o c i a l L i n k a g e s F a c t i o n s O b j e c t i v e s i n d u s t r i a l e l i t e , e s p e c i a l l y t h e m ono p o l y f a c t i o n C o n s e r v a t i v e s a c c e l e r a t e d e c o n o m ic g r o w t h t h r o u g h t h e e x p a n s i o n o f c a p i t a l i s m e d u c a t e d u r b a n u p p e r m i d d l e - c l a s s e s , s e l f - e m p l o y e d p r o f e s s i o n a l s , m i d d l e - r u n g f i r s t o r s e c o n d g e n e r a t i o n e n t r e p r e n e u r s M o d e r a t e s " d e v e l o p m e n t " c o n s i s t i n g o f g r o w t h a n d c a p i t a l f o r m a t i o n p l u s s t r o n g d i s t r i b u t i v e m e a s u r e s u n d e r t a k e n b y t h e S t a t e I t h e u r b a n a n d I a g r a r i a n p o o r ; s m a l l 1 i n d i g e n o u s f i r s t I g e n e r a t i o n j e n t r e p r e n e u r s R a d i c a l s s o c i a l i s t t r a n s f o r m a t i o n Source: As m text Given the differences in the linkages, objectives and visions of the role of the State, it can be hypothesized that these different factions within the Congress Party envisioned the potential State to be vested with different kinds of autonomy. The radicals were obviously concerned with structural autonomy, in the sense of using the state to transcend the 6Each of these linkages were not equally strong or influential in policy-making. The linkage of the radical faction to the urban and agrarian poor were weak and amorphous, while the industrial elite was obviously much more organized in representing itself. Recently, however a series of studies on the nature of grass-roots mobilization at the moment of state formation have brought to light that the extent of involvement of the rural and agrarian poor were quite substantial, even though localized and amorphous (Guha 1984). 102 existing social formation. The moderates, on the other hand, were concerned more with bureaucratic and instrumental autonomy since their primary objective was to develop and execute a plan comprising both production and distributive targets. The conservatives were, understandably, not concerned with state autonomy in the sense the other two factions were. In fact, they were concerned with preserving the autonomy of private enterprise by specifying the limits to state participation; in particular, they sought to put restrictions on the scope of the public sector on the basis of the Bombay Plan drawn up in 1944 (Bombay Plan 1944:37-9). In the period that followed the formation of the post colonial State, the importance of the radical faction gradually atrophied.7 One important reason for the failure of the radicals to acquire political power was the lack of commitment of their leaders who were not ready to make the required choices. Jawaharlal Nehru was the most important of these 7The attrition of the radical faction began almost immediately after Independence, despite the dramatic resolution passed by the Congress in 1947 under Nehru's leadership. One reason was Nehru's political office. The second reason was a very significant increase in the membership of the Congress Party at the local and village levels, where most of the members came from the propertied classes. Third, the conservative faction within the Congress moved for and was able to pass a resolution that "no member of the Congress Party could be the member of any other political party, communal or other, which has separate membership, constitution or program". This was directed at, and succeeded in considerably attenuating the strength of Congress Socialist Party whose members were all members of the workers' and peasants parties— formal and informal— and were linked to the Forward Bloc, the party of the radical nationalists of Bengal (Frankel 1978:70-2). 103 radicals, who, according to some authors was "co-opted" by an alliance between the political and industrial elite led by Mahatma Gandhi and G.D. Birla, one of the leading contemporary industrialists. The "instrument of co-optation" in the case of Nehru was the offer of the first prime ministership of independent India in 1947 (Chandra 1978).8 Nehru's assumption of office served two purposes. First, it projected the image of a victory for the radical faction, whose association with the nationalist/anti-imperialist struggle was an important element of the legitimacy of the nascent post-Colonial State. Second, it helped to diffuse radical political demands— especially land reforms and the nationalization of private enterprise, which Nehru and the radical faction had espoused since the very initiation of discussions about the nature of the independent State (Chandra 1975:1311). In other words, Nehru's election to the office of the Prime Minister encouraged the radical groups (at least temporarily) to work within the system rather than opposing it. This was a relief to the conservative and the moderate factions who were unified in their joint disagreement with the radical project of socialist transformation. However, this unified 8"Jawaharlal Nehru's rhetoric of socialism had already been assessed at its true worth by GD Birla and big business in 1936. Nehru emphasizes his willingness to go along with the designs of big business - who were the framers of the Bombay Plan of 1944 — when he publicly opposed the direct tax provisions of the Budget, in spite of a prior agreement to the contrary.(Bagchi 1991:612). 104 stand began to weaken very soon, as their own disagreements over development policy began to unfold (Bagchi 1993:613). In order to trace how these factions within the State dealt with their constraints in the post-Independence period, and who came to dominate the State, I also need to characterize the nature of capital. It is to this that I turn now. HISTORICAL ORIGINS OF CONSTRAINTS ON STATE AUTONOMY: THE CHARACTER OF CAPITAL The most striking feature of industrial capital as it existed at the moment of state formation was the degree to which it had been able to constitute itself as a class. Class formation occurred primarily as a result of three processes: the transformation of merchant capital to industrial capital, the consolidation of industrial capital vis-A-vis foreign capital, and, the increase in political and organizational cohesion between different groups of capitalists. Most notably, the bourgeoisie showed the necessary ideological cohesion to subvert intra-class conflicts and short-term interests in order to safeguard their long-term interests. (Mukherjee & Mukherjee 1988:533). Below I briefly describe the social roots of the Indian bourgeoisie, their relationship to foreign capital, and their organizational endeavor as it evolved through the early twentieth century up to 1947. The most notable of the merchant communities which were able to transform themselves into a leading industrial group 105 were the Parsis, a migrant community from Persia. The Parsis were amongst the first communities to enter into a collaboration with the British (Masani 1561; Bagchi 1972:202). Operating primarily out of the western Indian city of Bombay, the Parsis soon established dominance in basic industries like steel, coal and cotton before World War I. Foremost amongst the Parsi business houses was the House of Tatas; founded by JN Tata is 1912, the House of Tata came to enjoy a monopoly position in India’s steel and heavy engineering industries - both of which were leading sectors in Indian industrialization (Buchanan 1934: Chapter XIII).9 To this date, the House of Tatas continues to be one of the two largest conglomerates in India. The second important community was formed by the Marwaris, who were also a migrant merchant community from the desert areas of north-western India. They migrated to the eastern city of Calcutta, and entered into industrial investment long after the Parsis (Tomlinson 1981:460). The source of primitive accumulation for this community lay in speculative profits made during the First World War as well as earnings from usury, which they began transforming into industrial capital since the late 1920s. By the end of World War II, eminent Marwari business houses like that of Birla Brothers had begun to dominate the industrial scene in the eastern city of Calcutta through their investments in cotton, jute, sugar, paper and a 9Lead sectora are industries in which the productivity gains are initially realized, being indicated by a accelerated growth of output (Amsden 1989). 106 variety of other consumer goods (Trimberg 1971:265-6; Tomlinson 1981:460). The take-over of expatriate interests by Indian businessmen that took place in Bengal (the eastern region) after 1945 was largely engineered by the Marwari business groups: the Birlas, the Dalmias, the house of Surajmall Nagarmalls, all constituted eminent conglomerates who challenged the dominance of imperial capital during colonial rule (Tomlinson op. cit.:462-3). The third important business community which contributed to the industrial transformation in India consisted of the Bengali businessmen of the eastern regions of India. Unlike the Parsis and the Marwaris, the Bengali businessmen came from a landed class. The Bengalis started by transferring agrarian capital to financial capital. This was done by establishing a number of banks between 1845 and 1870 with majority Indian ownership and with the specific purpose of reducing dependence on foreign capital or indigenous usury capital (Bagchi 1972:204). As I will mention later, the creation of this financial capital aided the development of entrepreneurship in Bengal which was much smaller in scale than the other communities. The Bengali entrepreneurs, known for their radical anti-imperialist anti-monopoly ideology, could not compete with the other communities in terms of actual expansion (Sinha 1961:Vol II, Chapters 7-9). In sum, then, the Indian bourgeoisie as it existed at the time of Independence in 1947 was primarily comprised of the 107 three business communities discussed above. In addition, there were certain local business communities dispersed in several regions of India. As some authors argue, many of these small business groups were "weeded out" during the twenties; as I will see below, such a Darwinistic screening process allowed for a monopolistic organization of capital in India at a very incipient stage of industrial development (Bagchi 1972:210). I come now to the second argument raised at the outset, viz., that the success and/or dominance of the business groups at the moment of state formation derived largely out of their relationship with foreign capital. There is some disagreement over this issue (Dutt 1947;503-4; Pavlov 1975; Chandra 1982). The most accepted thesis in this regard seems to suggest that the early part of the twenties saw a transition in the nature of the Indian bourgeoisie. This transition marked a change in the position of Indian capital from being an agent (or a comprador) of British capital to a being partner on a more equitable footing. This change was due both to the rise of a class of aggressive, risk-taking Indian capitalists during the early twenties and to a continuous decline of expatriate firms, a part of the dynamics of metropolitan capital (Tomlinson 1978). This indigenous bourgeoisie sought to minimize its links with imperial capital after 1914, and did not function as "an ally of British rule in India" (Chandra 1982:392). Chandra further sug gests that this class successfully financed and led the 108 anti-imperialist struggle and "set up an independent bourgeois State" (Chandra op.cit, 391-404). Between 1914 and 1947, the Indian capitalist class was able to strengthen its hold over the Indian economy vis-a-vis foreign capital. This was achieved through three processes: (a) by entering into areas such as heavy chemicals, iron and steel which were, until then, the exclusive domains of British capital (Bagchi 1972:83ff, Ray 1979:chapter 3); (b) by entering into the traditional areas of British/European influence, e.g., financial activities (such as banking and insurance), shipping, coal and tea (Kidron 1965); and (c) by expanding the general size of their operations. The share of Indian capital in large industries vis-d-vis British capital increased steadily between 1915-16 to 1943-44. By 1944, Indian private capital controlled about 62 per cent of the manufacturing units employing 1000 or more workers, and about 58 per cent of the labor force in such factories (Mukherjee and Mukherjee 1988:532). While British capital still controlled a significant share of the largest units, these constituted only 4.7 per cent of the total factory units (Roy 1953:2). Indian control over the domestic market also increased during the period in review. One study estimates the share of foreign enterprises in the total gross output of Indian industry in the eve of Independence at only 25 per cent. Even after adding to this the share of the domestic market through imports, the total share is estimated to a maximum of 28 per cent 109 (Shirokov 1973:48-9; Mukherjee & Mukherjee 1988:532). The same is held to be true for the Indian share of finance capital. While in 1914 foreign banks owned 70 per cent of the total deposits, by 1937, this share had decreased to 17 per cent (Kidron 1965:42). The gains from this expansion of control by the Indian capitalist class was realized primarily by the largest business houses. In 1946, the total assets of the three business houses of Tata, Dalmia-Jain and Birla were Rs. 6000 million while the combined assets of the three largest European companies (Andrew Yule, Bird-Heilgers and Martin-Bum) were only Rs.740 million. Further, between 1939 and 1945, the paid-up capitals of four Indian companies had crossed the 100 million mark, while only one British company in India, Bird-Heilgers had managed to do so (Shirokov 1973:49; Tomlinson 1978). The growth of monopoly houses, characterized by inter locking of directorships was evident in India as far back as the 1930s. In 1932, the Bombay Shareholders' Association submitted a list of showing an "astonishing number of interlocked directorships": Name No.of companies in which Directorships held F.E Dinshaw 65 Sir Purshottamdas Thakurdas 42 Sir Pheroze C. Sethna 34 H.P. Mody 14 Sir Fazulbhoy Carimbhoy 26 Sir Lalubahi Samaldas 26 N.B Saklatwala 29 Source: Bagchi 1972:208 110 The monopolistic nature of capital was also reflected in the high profits and low output levels that characterized production. One indication of this was in the fact that though in terms of actual output India's record during the war was not remarkable, industrial profits had been increasing at unprecedented rates. Most branches of industry, including the traditional ones were increasing their profits to such an extent that it induced the British government to introduce an Excess Profits Tax in 1942-43. Figure 4.2 The Monopolistic Mature of Accumulation in India Index of Industrial Index of Year Prodn. Profitability (1936=100) (1936=100) 1939-40 114 590 1940-41 117 617 1941-42 123 896 1942-43 109 926 1943-44 108 1044 Source: Bengal Industrial Chamber, Survey Commission Report, Chapter 9, pp. 212-3. This big bourgeoisie had also established a pattern of primitive accumulation by this time (Ghosh 1988:245-6). The sources for this were diverse. First, there was a very old and indigenous system of banking combined with trading activities. These bankers Isharafis) served as intermediaries for the joint- stock banks set up by the British and amassed wealth by using their position to practice usury (Timberg 1973:2). Second, there were various forms of speculative trading in the indigenous and somewhat primitive equivalents of stock, Ill commodities and futures markets, which were extremely profitable (Trimberg 1973:23-9). Third, there was primitive accumulation from land, especially by the business communities of the east (Mukherjee and Mukherjee 1988:537). The fact that members of the big bourgeoisie primarily came from erstwhile merchant and migrant communities provided some sociological common ground. There were, however, differences in levels of formal education and the degree to which they were "anglicized". These differences were consciously undermined by their joint resistance to imperial capital and to the landed class which often resisted the drive toward industrialization and saw their interests in terms of continuing British Rule (Chandra 1974:222). Some scholars, such as Levkovsky, also point out the significance of the fact that by the twentieth century the entire small sector was Indian owned (Levkovsky 1966:287). It was not only a national-bourgeois ethos, but also the anti- monopoly ethos that permeated this fast evolving small sector. Especially in the more progressive regions of the east, which were strongholds of the radicals, there was a strong consensus for expanding the industrial base consisting of associations of small independent producers (Ghosh 1988:2446-8). This group of small entrepreneurs were distinct from monopoly capital in terms their sociological origins. They did not have linkages to British capital as managing agents or financial intermediaries; neither were they speculators or 112 traders. Most of them came from the educated petty bourgeoisie— scientists, technicians, skilled workers etc. Second, the source of their initial capital was from their own earnings or borrowings from relatives and friends. Third, they were distinguished by their knowledge of the production process, and most often were innovators of products and processes (Ghosh 1988:2446). As a survey Report by the Reserve Bank of India pointed out. Like many of their European counterparts in the eighteenth century, the pioneer industrialists (of Howrah] started entirely with their own resources... their capital...was their own skill and their confidence in themselves...like the English pioneers they achieved this expansion through modest living, ploughing back their profits, and making most of their limited resources.. (Reserve Bank of India 1964:31-6). To sum up then, the Indian private sector at the moment of State formation was a highly polarized entity. On the one hand, it comprised a strongly integrated and economically fortified oligopolistic faction. On the other hand, it comprised a loose federation of small and financially weak nationalistically-minded entrepreneurs. The latter group was allied with the radical faction of the political elite. In fact, many of these small entrepreneurs were former party workers. The members of the conservative faction of the political elite, on the other hand, were elected to office with the aid of the big bourgeoisie (through campaign financing etc.) and exercised 113 Influence by virtue of their relationship with the latter. The fundamentally unequal positions of the two factions of the private sector were a product of primarily the difference in financial resources that they could mobilize, but no less, the organizational cohesiveness of the larger group, as I will see below. British capital underwent a continuous attenuation--or at least stagnation - from the First World War up through the Transfer of Power in 1947. The primary reason for this was, as previously mentioned, the rise of Indian capital. Although British firms could retain their existing stakes until the interwar period, Indian capital began to play a more dominant role in new enterprises and the more non-traditional industries like steel. The major breakthrough by the House of Tatas in entering the production of steel and hydel power and its consistent refusal to sell stocks to interested foreign buyers succeeded in keeping British capital from entering any of the high growth areas (James 1948:616)10. Second, the strength of Indian capital was also supplemented by the growing political consolidation of the bourgeoisie; through its political consolidation, Indian 10 There is general agreement as I have explained elsewhere, that Indian capital had by this time, consciously ceased to function as an "ally of British capital". The reasons for this are not clearly identifiable; there is however a materialistic explanation that the Indian bourgeoisie understood the significance of a large domestic market very early on. This perception, couched in terms of a nationalistic ethos, perhaps helped the bourgeoisie gain legitimacy and support in the context of contemporary politics. 114 capitalists were also able to reverse the earlier discriminatory practices {primarily in the form of trade protection) of the European businessmen. Some authors argue that a substantial part of the profits earned by British capital was in the form of "rents" generated by these discriminatory practices, and hence their removal cut into those profits as well (Bagchi 1972:344- 86) . A third and more obvious reason was that British capital had entered into a conscious and planned retreat since the First War due to expectations of a worsening relationship with a future nationalist government, supported by a rising bourgeoisie (Ray 1979:365-8; Tomlinson 1981:464). Finally, this decline could also be accounted for as part of a natural process of decay brought about by an over-commitment to unprofitable sectors of the economy. While there is a lot of debate as to which of these hypotheses are more plausible, there is a general agreement that between 1910 and the Transfer of Power in 1947 there occurred a secular decline in the importance of British capital concurrently with a rise in domestic monopoly capital. I indicated above that the Indian monopolists at this time showed as much concern for their political consolidation as economic expansion. It is to these aspects of organization and representation that I turn now. Efforts were being made by the leading industrialists like GD Birla and Purshottamdas Thakurdas to set up a national 115 organization for business, representing commercial, financial and industrial business. This culminated in the formation of the Federation of Indian Chambers of Commerce and Industry (hereafter FICCI). Because of its ability to attract participation from numerous groups of capital in the far-flung regions of India, the FICCI was soon recognized by the British government (Kochanek 1970; Levkovsky 1966:323). By the end of the thirties, the FICCI was represented in various government bodies including but not limited to the Planning Commission Advisory Board, the Export Advisory Council, the Import Advisory Council, the Indian Council of Agricultural Research, the Indian Institute of Science and the Indian Statistical Institute (Mukherji 1984:167-78). Most of these governmental authorities also had members nominated by the Associated Chamber of Commerce (ASSOCHAM), a confederation of expatriate capital groups situated in different centers throughout India. By representing itself in the same bodies as ASSOCHAM which was dominated by imperial capital, the FICCI became an institutional forum for direct confrontation between Indian and foreign capital (Chatterji 1981:340). Further, FICCI also initiated a process whereby the individual local chambers of commerce (which comprised FICCI) sent their members to the provincial and State legislatures and other local government bodies (Mukherji 1984:182-3). Through these measures, the FICCI become vocal not only about issues concerning business, but about all political and economic issues 116 of the day. In addition to issues of business, the bourgeoisie was particularly intent on using the FICCI forum to intervene in the issues of labor, legitimation and imperialism (FICCI Annual Reports, 1941:22-24; 1946:71-6; Collected Papers of Pursh- ottamdas Thakurdas (hereafter PT Papers), 1923:104).11 The financial, ideological and organizational power of the big bourgeoisie in India before and after state formation explains its omnipotence in the development efforts of the State. The political elite, at least initially derived much of its power from the fact that the bourgeoisie saw the expansion of the state apparatus as necessary to the consolidation of their own (the bourgeoisie's) position, and hence sought to strengthen the nationalist movement. This consolidation would be achieved by using the state apparatus to legitimize the appropriation of social resources for accumulation. This necessity, along with the growing radicalization of mass politics, provided the bourgeoisie and the political elite with the raison-d'etre for an expansive state. Only such an apparatus could help in dealing with the legitimation problems without any major class compromise (Sarkar 1976; Gordon 1978; Mukherjee 1981). 11 "Indian commerce and Industry are intimately associated with, and are indeed, a part of the nationalist movement— growing with its growth and strengthening with its strength" (FICCI, Annual Report 1928:4). GD Birla wrote in his special introduction to the Report, "It is impossible in the pres ent . .political condition in our country to convert the (British) government to our views..the only solution ...lies in every Indian businessman strengthening the hands of those who are fighting for the freedom of our country" (FICCI, op.cit, 264). 117 In what follows, I will discuss the implications of the composition of state and capital on the constraints on state autonomy. THE INITIATION OF INTERVENTION IN POST-COLONIAL INDIA: IMPACT OF CONSTRAINTS ON STATE AUTONOMY In terms of our theoretical discussion on state autonomy, I have summarized the relevant notions in Figure 4.3. Our discussion above should indicate how the level of development of the bourgeoisie and its internal cohesion imposed structural constraints on the state. I also discussed the pattern of representation of the private sector in the various state bodies and the lobbying power of the private sector through forums like the FICCI (Kochanek 1970). This pattern of representation enabled the bourgeoisie to considerably limit the instrumental autonomy of the state. The instrumental autonomy of the State was also constrained by the financing provided by the bourgeoisie for political campaigns and the anti-imperialist struggle. Even though campaign and/or party financing has always been an important issue, there is not much documentation avail able in this regard before 1937. In 1937, the British Government agreed for the first time to grant political autonomy to the provinces; this held out the prospect that the Congress could contest elections in each of these provinces and, on winning, could establish its autonomous provincial government (Markovitz 1981:489). G.D Birla, along with the other business 118 leaders welcomed this decision and agreed to finance the Congress campaign. In some provinces, business involvement in financing came only in exchange for nominating business leaders as Congress candidates. On an average however, there was "no perceptible increase in the direct participation of businessmen in electoral politics. FIGURE 4.3 CONSTRAINTS ON THE AUTONOMY OF THE INDIAN STATE c o n s t r a i n t s F a c t o r s o f f s e t t i n g t h e i m p a c t o f C o n s t r a i n t s S t r u c t u r a l A u to n o m y G l o b a l s t r u c t u r e : I n d i a ' s p o s i t i o n w i t h i n t h e i m p e r i a l i s t - c a p i t a l i s t s t r u c t u r e w e a k e n in g p o s i t i o n o f t h e i m p e r i a l p o w e r w i t h i n I n d i a L e g i t i m a t i o n p r o b l e m s t r i g g e r e d b y t h e f o r m a t i o n o f w o r k i n g c l a s s c o n s c i o u s n e s s , i m m i s e r i z a t i o n i n t h e c o u n t r y s i d e , r i s e o f t h e L e f t , a n d m a s s m o b i l i z a t i o n a s p a r t o f t h e a n t i - i m p e r i a l i s t s t r u g g l e L o c a l s t r u c t u r e : s t r o n g p o s i t i o n o f t h e l o c a l ( b i g ) b o u r g e o i s i e v i s - A - v i s t h e f o r e i g n b o u r g e o i s i e I n s t r u m e n t a l A u to n o m y a. r e p r e s e n t a t i o n o f t h e p r i v a t e s e c t o r i n t h e com m i t t e e s , a d v i s o r y b o a r d s e t c . s e t u p b y t h e S t a t e b. c a m p a ig n f i n a n c i n g a n d o t h e r f o r m s o f f i n a n c i a l d e p e n d e n c e a. l o b b y i n g B u r e a u c r a t i c A u to n o m y a. t h e a b s e n c e o f a c o h e s i v e p o l i c y p r o c e s s b . t h e r e q u i r e m e n t t h a t p l a n n i n g , a n d s e t t i n g o f t a r g e t s w e r e t o b e m e r e l y " i n d i c a t i v e " a n d n o t " d i r e c t i v e " a. e x c e s s i v e " s o f t " em b e d d e d n e s s " a n d d e f i c i e n t " h a r d e m b e d d e d n e s s " 'f o r m a l i z a t i o n o f a s e l e c t i o n s y s t e m w h e r e t h e s o c i o l o g i c a l b a c k g r o u n d o f t h e b u r e a u c r a t s w a s n o t t h e d o m in a n t c r i t e r i o n f o r e n t r y i n t o t h e b u r e a u c r a c y E m b e d d ed A u to n o m y a c o n t r a d i c t i o n b e t w e e n e x c e s s i v e " s o f t " em b e d d e d n e s s " a n d d e f i c i e n t " h a r d e m b e d d e d n e s s " Sources: As in text 119 Businessmen tended to work behind the scenes and continued to use successfully and in a systematic manner, the financial weapon to navigate political action" (Markovitz op. cit.: 494). The most important of these influences between 1937 and 1947 was the ability of the business leaders to pressure the Congress to weed out trade unionists and leaders who they thought were "too radical" (Tomlinson:83). In sum, the involvement of the business leaders had become an integral part of Congress politics from the 1920s. In his 1928 address as FICCI Chairman, Birla, for example, spoke of the "need for every businessman to strengthen the hands of the freedom fighters." In 1937, when the Congress contested seats for the first time under the Raj, the involvement of business became crucial for Congress' success and it only gained in importance as the pressures of competitive electoral politics continued to grow (Bambhri 1982:142). However, the fact that the bourgeoisie also saw its own interests associated with the anti-imperialist struggle moderated somewhat the effect of this constraint on the autonomy of the state. These constraints on instrumental and structural autonomy, also limited the potential for bureaucratic autonomy (Desai 1979:Chapter 6). The pre-conditions for bureaucratic autonomy lay in the selection process of the bureaucracy; this consisted in a nationwide entrance examination open equally to all Indian citizens. As such, the members of the Indian bureaucracy are, in the tradition of its British antecedent, 120 recruited from groups that "do not have much of a direct stake in the fortunes of private capital...except at the lowest rungs of the bureaucracy, at the level of local administration, the class origins of officials from families in trade, industry or farming do not directly determine their policy actions" (Bardhan 1984:52). Despite being open "equally to all Indian citizens", in 9 practice, however, the process of entry into the bureaucracy always required at least graduate or even post-graduate education and, as such, became restricted to the middle and upper-middle classes. In fact, employment in the bureaucracy came to enjoy immense prestige amongst these classes, leading to the creation of yet another "dominant class” in addition to the bourgeoisie and the landed class (Bardhan 1984:52). This kind of "bureaucratic autonomy," defined simply in terms of the sociological roots of the bureaucracy, does not necessarily translate into increased autonomy for the State. To the contrary, the Indian case illustrates the opposite relationship, viz., how constraints on state autonomy can limit the potential autonomy of the bureaucracy. It needs to be emphasized that the primary role of the bureaucracy is to implement, not develop, policy. Whether or not it executes a given project efficiently, it must still remain circumscribed by the extent to which the state can develop the project - indepen dently of private demands - which the bureaucracy is to execute. It is this deliberative ability of the State and not the 121 implementing function of the bureaucracy that is our concern here. In this sense, it is instructive to look at the politics of the creation of the Planning Commission. The Planning Commission was conceived of as the entity responsible for developing central plans that would detail how a chosen strategy of capital accumulation, based on Soviet-style industrialization was to be implemented. In developing these plans, it was supposed to determine the required level of savings and how resources were to be allocated. As such, it would also determine the way in which the private sector should produce, save and invest. In line with Soviet-3tyle planning, the Plans would identify the sectors in which investment should be located, so as to achieve the desired trajectory of growth (Mahalanobis 1961). In its conception, then, the Planning Commission was to be the equivalent of the Economic Planning Board in Korea or the MITI in Japan, both of which are in turn modeled on the central planning entities of command economies.12 The critical difference between the socialist planning authorities on the one hand, and the Planning Commission, the EPB and the MITI on the other, is that the latter were trying to plan for private enterprise. Korea and Japan were developing plans almost exclusively to guide private enterprise in such a way as to ensure that the profit objectives of private actors did not 12In fact. Haggard suggests that Korea modelled its Economic Planning Board after India's Planning Commission (Haggard 1990:64). 122 supersede the growth objectives of the state. India, to the contrary, developed plans primarily for the public sector and with the limited objective (limited in comparison to Korea and Japan) of preventing certain types of private behavior. It had not been possible, however, for the advocates of planning to ensure an institutional mechanism appropriate even for these limited objectives (see Chapter 5). The central question in this regard was how much autonomy the Planning Commission was to be vested with, and how much detail in target setting and investment allocation the private sector would tolerate. Immediately after the presentation of the 194 9- 50 Budget, the resolution for a Planning Commission was finally passed— albeit with two major concessions. First, in the con text of the more radical questions of land reform and public control of industry, Nehru's more conservative opponents pre vailed in stalling at least any immediate steps in those directions (Frankel 1978:85). The final draft of the Cabinet Resolution that established the Planning Commission on March 15 of 1950 singled out three "indicative" principles for the preparation of a Plan: (1) that citizens, men and women equally, would have the right to an adequate means of livelihood; (2) that the ownership and control of the material resources would be so distributed so as to best serve the common good and; (3) that the operation of the economic system does not result in the concentration of wealth (Draft of the Cabinet Resolution 1950:3). Apart from these rather vacuous "indicative 123 principles”, no concrete measures could be incorporated into the Resolution. As it turned out, from its very initiation the Planning Commission was relegated to an advisory status. All recom mendations on Plan policy were to be submitted to the Cabinet (of the Congress Party) for consideration and approval. Thus, Nehru had been able to extract very little in the way of concessions with respect to planning, only certain vacuous indicative principles and advisory status for the Planning Commission.13 As I discussed in Chapter 3, it had to be clearly established that Plans and targets were to be merely indicative rather than directive as in Korea. The Resolution of the Congress that created the Planning Commission specified the Commission's role in the government as follows: The Commission will make recommendations to the Cabinet. In framing its recommendations the Commission will act in close understanding and consultation with the Ministries of the Central Government and the Governments of the States. The Commission will have no responsibility of taking or implementing decisions. The responsibility of taking and implementing decisions will lie with the State and Central governments" (Resolution No.1-50, Gazette of India, 15 March 1950: 1) . 13Ab the Chairman of the Planning Commission, Nehru decided to respond to this by taking a "self-reflexive" stand and started out with the warning (to his radical colleagues) that "a hasty implementation of measures intended to bring about economic equality, may in the short-run affect savings and investment adversely, and frustrate the immediate needs of the Indian people" (First Plan Draft Outline, pll). Although this Draft Outline endorsed the goal of social transformation, virtually all programs included in the plan were justified in terms of the economic goal of increasing production. 124 The chief connecting link between the Commission and the Executive is through the Prime Minister, who, in addition to being the chief executive and the Chairman of the Congress Party, was also to be the Chairman of the Planning Commission. In addition, the Finance Minister was to be the Deputy Chairman of the Commission (Resolution ibid, cited in Hanson 1966: 71). The topmost echelons of the Commission were to be constituted by a group of experts and technicians as well as "non-experts" whose participation "would contribute significantly to the activities of the Commission". The Prime Minister and the Finance Minister were each vested with the discretionary power to recommend both experts and non-experts to the Commission. Below this core group, the Commission was to comprise a collection of different departments in various areas such as agriculture, industry, education, health, housing etc. (Hanson 1966:74-5). The peculiarities of its constitution vested the Planning Commission with a contradiction of "an unnatural kind of prestige and importance" on the one hand, and no executive authority on the other. Those who have critiqued the Commission from the inside have seen it as having "failed and the roots of this failure lay in the process by which, the Commission's core of experts have always been outweighed by those who bring with them the natural desire to exercise power and patronage" (Gadgil 1969:110; Hanson 1972:71). From the outside, the primary critique of the Commission has been that it had over-extended 125 itself in trying to participate in too many decisions without being adequately acquainted with the intricacies of the actual context within which those decisions are implemented. The insulation of the Planning Commission from the context in which its plans were implemented, make for what Evans calls "excessive autonomy and inadequate embeddedness" (Evans 1992:172). As I argued before, this refers to the autonomy of the bureaucracy rather than the State. With respect to the broader question of state autonomy, the fact that the Planning Commission had no executive authority was the most decisive factor. This exclusively advisory status of the Commission pre empted the possibility that it gain the authority that Korea's Economic Planning Board (See Chapter 3). The constraints on state autonomy were also imposed by several other types of complex linkages between individual industrialists and politicians. Mahatma Gandhi, for instance, had special relationships with most of the industrial leaders, especially the largest and most powerful group closest to the policy process (Chandra 1975:1311-15). Mahatma Gandhi's relationship to the leading industrialist, G.D Birla, was particularly notable. In one of his letters to a friend, G.D Birla wrote, I need hardly say I am a great admirer of Gandhiji. In fact I am one of his pet children. I have liberally financed his khadi (cottage industry) movement and untouchability activities...I wish I could convert the authorities to see that he is greatest force in the side of peace and order..He alone is responsible for keeping the left wing in check...(Birla 1932:46). 126 By virtue of this relationship, the Mahatma could always ensure that all policies that were suggested by the indus trialists were taken up and negotiated at a political level and approached as political problems (Chandra op.cit, 1315). Obviously, most industrial leaders enjoyed this opportunity to use political leverage for business issues, and in that sense they were all somewhat aligned with Gandhi (Ghosh 1988:2445-6). After Gandhi's assassination in 1947, Nehru took up this strategy of developing complex linkages with people apparently opposed to his ideology. Elements of hard embeddedness, consisting of linkages between the State and the private sector that foster autonomy, were not as evident in India as in Korea. Such linkages would consist in the various ways in which the state would influence decision-making in the private sector and, in that sense, would imply constraints on the autonomy of capital imposed by the state. This takes us back to the question of structural autonomy: is it possible for the state to intervene in private decisions when it is itself constrained by the structure? In India, the question takes on a peculiar complexity, especially if one considers the moment of State formation. Given the structural constraints imposed by the level of development of the bourgeoisie, why was it that the State was able to exert any degree of relative structural autonomy at all? How was it able to establish the interventionist apparatus to the extent it did? 127 The potential for this relative structural autonomy lay in two factors. First, there was the necessity, perceived most of all by the nationalistic bourgeoisie, of consolidating the politically independent Indian State. Secondly, there was the need for legitimation, which was by the bourgeoisie and the conservative-moderate alliance within the Congress. In what follows, I will very briefly identify the two major elements of the legitimation issue. First, there was the concrete reality of growing immiserization in the countryside since the 1930s (Mukherji 1984:173) which needed to be dealt with through economic measures. Second, there was the problem of increasing political mobilization of factory labor and the growth of the Indian Left (Chandra 1983). These problems necessitated some sort of a strategy that would be able to legitimate a capitalist state (Joshi 1977). Second, the Indian labor movement, fostered initially by colonial capitalism and which grew steadily during the 1920's, gained a new momentum in the 1930's (Markovits 1981:496). The number of strikes increased, the number of unions and union membership rose steadily, while the two largest federations of trade unions initiated a process of gradual rapprochement from a 1 2 8 previous position of antagonism (Revri 1972:204; Markovitz 1981:497).14 Growing labor unrest caused the Congress to lose seats in the provincial legislatures and eventually forced them eventually to pass a series of labor welfare measures in 1937 at the meeting of the Congress Labor Committee (Markovitz op.cit, 501). However, the Congress was very cautious "not to hit the capitalist interests too hard", while taking care of some of the immediate legitimation needs. Inquiry committees were set up to look into the question of wages, wage indexation, legislation on the settlement of disputes, and most importantly the represen tation of labor in management. Yet, in general, the Congress Labor Committee was successful in bypassing any firm resolution, leaving most of the issues pending. These were later taken up by industrialists, as I show below (Markovitz op. cit.: 503-4). A similar situation prevailed in the farm sector. Demographic pressures on the fixed landed base greatly increased the number of the landless and the virtually landless, many of whom had been pushed out of subsistence farming. In the 1920's and the 1930's their situation was becoming impossible, being subject to the vagaries of an incomplete market system for securing a minimum supply of their basic needs. The situation came to a climax during the Great Depression, which, while temporarily providing them with wage bonuses, initiated a structural shift from permanent and patronage-based employment 14The number of registered trade unions increased from 262 in 1937 to 420 in 1938 to 762 in 1942 (Markovitz 1981:501). 129 patterns to short-term, more casual, and insecure employment patterns (Washbrook 1981:709). This growing misery of the rural poor resulted in a series of agrarian riots and violent confrontations with landlords. There was a "perceived danger that not only would the agrarian elite not be able to hold down the countryside but that some of its members might even join and sponsor an attack on the extant state institutions .." {Washbrook 1981:710). As such, from the point of view of the conservative- moderate alliance and the industrial bourgeoisie, the preservation of the peaceful land-owning society was perceived as necessary for guaranteeing order in the countryside. On the understanding that its removal might produce conditions even less conducive to capitalist activity, industry was ready "to pay its price", by withdrawing or softening their demand against the farm sector. At this point, i.e., in the 1930s, these demands had included the introduction of agrarian taxes, confiscation of unused feudal estates for industrial use, etc. The perception that gradually seemed to unite the industrial and agrarian elites at this point was the necessity to'obstruct the spread of social unrest, both in agriculture and industry. Both saw the State as the only arena through which to achieve this goal (Patnaik 1972? Washbrook 1981:710).15 15This point of agreement between the landed elite and the industrial class did not moderate the main project of the latter: i.e to initiate a trajectory of growth centered around industrial development, and using the state to create the physical pre-conditions for capitalism to evolve. Some authors argue that the growth of the Indian capitalist class from this point onward was rooted in its "contradictory" relationship to the landed class (Patnaik 1972). 130 The response of capital to the legitimation issues necessitated by the above conditions were somewhat complex and contradictory. On the one hand, capital (at least the leaders) showed a sophisticated understanding of the implications of the diffusion of leftism, increasing working class consciousness, etc., and agreed with the political elite that the apparatus of the State could be used to arrest these tendencies by using selective legitimation measures. The agreement over central planning and state intervention arose precisely from this under standing and created the basis for a coalitional or bargaining relationship between state and capital rather than an instrumen tal (in the classical Marxist sense) one.16 The political elite also perceived its "mass appeal" as the major source of its bargaining power, and consciously used it as such (Bardhan 1984; Kaviraj 1988:2431). 16nl have..indicated in our memorandum that no economic development of the kind proposed by us would be possible except on the basis of a central directing authority, and further that in the initial stages of plan rigorous measures of state control would be required to prevent an inequitable distribution of the financial burdens involved in it....The future economic structure should provide for free enterprise...It must ensure at the same time that the fruits of enterprise and labor are finally apportioned among all who contribute to the them and not unjustly withheld by a few from the many...An enlargement of the positive as well as the preventive functions of the State is essential to our type of developmental aspirations.." (Bombay Plan volume II ppl-3, cited in Deshmukh 1957:70). 131 On the other hand, the bourgeoisie showed remarkable intolerance for short-term measures in labor welfare. The Bengal Chamber, the Bombay Chamber and the Associated Chambers of Commerce all reiterated in a number of occasions their demand for changes in labor and taxation policies once the independent Indian state was formed (B.C.C Report 1946 and 1948, introduc tions) . Specifically, they recommended delaying the process of wage indexation till the prices of foodgrains were brought down. Second, they recommended reduction in taxes, especially the revocation of the Excess and Super-profits taxes inposed by the British Government since 1942 (Proceedings of the Second Meeting of the Central Advisory Council of Industries, 1949: 58-60). In doing so, they showed complete disregard for the social pressures created by labor unrest that had caused the Congress to respond through its Labor Committee Resolutions beginning in 1937. They argued that since the urgency of the 1937-38 situation had been successfully overcome, it was now time to revise the Congress' populist stance and enact labor and taxa tion policies more conducive to their own class interests (Mukherji 1984:189). 132 ISSUES OF DEBATE BETWEEN STATE AND CAPITAL: THEIR RESOLUTION AND THE IMPLICATIONS FOR STATE AUTONOMY In the above discussion I alluded to the major issues of debate between the state and private capital at the moment of State formation. Foremost amongst these was the question of nationalization of private enterprise.17 The question of nation alization, raised initially within the context of the na tionalist struggle (where even the bourgeoisie had lent tacit support to it) had by 1948 acquired substantial importance. After Independence the debate was raised within the Congress Party, but with substantial participation by business. Business participated both through its linkages with the conservative faction as well as through the apex chambers, that were by then quite consolidated. Because of this participation by business, the demand for extensive nationalization of existing private industries put forward by the radicals could not be pursued. Instead, the Resolution also ensured that the initiation of the public sector would by no means constitute a takeover of existing private firms (Bettleheim 1968:235). It indicated that only new industries would be placed under public ownership, and only in areas of strategic importance or where "private sector was unwilling to invest" (Mukherji 1984:190). Thus, except for the 17As I discussed above, the nature of capital was highly polarized with the ability of the big bourgeoisie to influence (or make) policy disproportionately greater than that of the small faction. As such, in discussing the impact of the bour geoisie, I will be referring tc the large faction unless otherwise stated. 133 areas of defense, shipbuilding, aircraft, oil refinery and telecommunication, the private sector could enter any other area it considered feasible (Chapter 3, chart 3). Next came the question of controls on private enterprise. Here the bourgeoisie used its ability to circumvent the instrumental autonomy of the State and defined these controls themselves in the Bombay Plan. The Plan spelled out the role of the state in terms of six broad principles: a) maximum possible freedom for private enterprise; b) safeguarding the interest of the community against abuse of individual interest; c) control of industrial capacity creation through licensing, control of allocation of raw materials, control of capital issues, wages and working conditions; d) state involvement in management rather than ownership; e) discretionary power over monopolies which were to be allowed but controlled and; f) state ownership of public utilities at least in the initial stages of planning (The Bombay Plan 1944:25-35). Based on these recommendations, a system of industrial licensing was established under the Industries Development & Regulation Act (IDRA) of 1951. The IDRA also provided for the control of capital issues and some other controls on wages and working conditions. The industrial leaders intervened systematically in the formulation of these control mechanisms after their initial adoption. As I will show in Chapter 5, one of the major aims of control over private enterprise, i.e., 134 controlling the growth of monopolization and concentration of wealth, proved impossible to pursue. Third, a program of central planning was adopted. The Planning Commission, with the aid of the state governments, would formulate plans for the operation of the entire economy, for the public as well as the private sectors. The limitations of the planning process, as embedded in the creation of the Planning Commission became more and more apparent over time (see Chapter 5). In terms of the more concrete issues of debate, the State had to make some concessions - especially in their labor and taxation policies. At a time when the business community was making record profits, the central budget for 1949-50 provided for a drastic reduction of corporate income taxes in the face of a deficit of over Rs.14 crores at existing levels of taxation (Frankel 1978:76), The decision was explained as follows: the most serious problem before the government now is the stagnation in the capital market resulting from a deep underlying fear of the future of that market. Unless the stagnation is checked and conditions are created in which the incentive to save and invest is revived, the industrial expansion of the country...is bound to be delayed. (Indian National Congress, Memorandum May 1949:8; Frankel 1978:76).18 18Not many systematic analyses of the withdrawal of private investment during this period is available. There is a broad consensus however, that given the bargaining power that the large business sector had vis-a-vis the state, it was using the threat of Investment withdrawal rather than actual withdrawal to elicit these gains from the state (Frankel 1978:74—77). 135 SUMMARY AND CONCLUSIONS We are now in a position to summarize our analysis of the initial set of constraints under which the independent Indian State attempted intervention. First, the State was vested at the moment of state formation with some degree of limited (relative) structural autonomy. This was manifested in its ability to endorse a program of structural transformation from an agrarian to an industrialized economy (despite the resistance of the dominant landed classes). Second, the State was able to supplement its program of assisting accumulation with significant mechanisms to control on accumulation (despite its initial collaboration with, and the resistance from large domestic capital). Third, the State was able to initiate and continue certain measures of legitimation (despite the resistance from both the landed and the industrial elite). This structural autonomy was rooted in a number of related factors. For one, the extant feudal structure was challenged by the bourgeoisie, who wanted the State to endorse a development path centered exclusively around industrialization. Specifically, the industrial elite sought to ensure an increasing allocation of public resources for the development of industrial infrastructure, at the expense of the agricultural sector. For this reason, the industrial elite did perceive need for the State to have a certain degree of autonomy. Most importantly, the legitimacy of the local structure was called nto question by the thematization of the socialist alternative 136 that was popularized in the context of the anti-imperialist struggle. At least in the period immediately following the Transfer of Power, it was not possible to extricate the question of national policy from that of a socialist transformation, which had been an important source of legitimation of the post- Colonial state itself. Hence, as the expansion of the State apparatus progressed over time, it did succeed to a large extent in achieving ends other than that of accumulation. Of course, it was particularly successful xn realizing those goals, which, even though distinct from accumulation, indirectly furthered this latter process. The most obvious example of this is India's "autonomy" with respect to the global economy during the interventionist period. However, there also existed at this time, limitations on this structural autonomy; these constraints both derived out of and reinforced the constraints on instrumental and embedded autonomy. Foremost amongst these was the historical relationship between the political elite and the business elite: as I discussed, much of the nationalist movement leading to the birth of the Indian state was financed and supported by the latter. Further, the principal areas in which the weakening of colonial capital took place were those of financial and industrial control. The gradual weakening of colonial power in these areas, which were the ones that finally led to the ending of British rule, were systematically initiated and organized by the bourgeoisie. As some authors argue, the result of these limitations "was an approach to planning that limited the government's role to the creation of social capital and financial incentives for the expansion of private enterprise" (Frankel 1978:86). As 1 will show in Chapter 5, the State could assert its structural autonomy, i.e attempt projects that were opposed by the dominant classes, only to the extent of establishing the institutions of control. Despite the degree of bureaucratic autonomy that 1 saw above, these institutions themselves could be implemented to a very limited degree. CHAPTER 5 EVOLUTION OF INTERVENTION IN INDIA : THE DYNAMICS OF RETROGRESSION INTRODUCTION In the last chapter I discussed the nature of intervention during what I called the moment of state formation. Roughly speaking, this period ranges over 1947 (the Transfer of Power) to 1960, and marks the end of the Second Plan. In this chapter I will discuss the evolution of intervention since 1960. The prime motor behind this dynamics was the conflict between agriculture and industry over public investment in the respective sectors. Yet another driving force was emergence of industrial stagnation that came bout as a result of the monopolistic nature of accumulation. It was in this context that the State had to confront the most ironic element of intervention: that it had, by design, endogenized a bias in favor of monopoly capital. As I discussed in Chapters 3 and 4, intervention during this period was undertaken to accomplish the project of state- assisted industrialization. As a result of this deliberate bias in the state's allocation of resources towards the corporate sector, complaints began to arise from the farm sector. During the Third Plan therefore, the State attempted to compensate for its earlier bias and initiated a modernization program for the farm sector. This was India's famous Green Revolution, the failures and successes of which are debated till today. One consequence of the- Revolution on which there is empirical data, is the phenomena of structural retrogression 139 that began since the mid-sixties (i.e the end of the Third Plan). This retrogression comprised of the deceleration of industrial growth rates and (see Table 5.1 and Table 5.2). As we will discuss below, there is a very significant debate in Indian political economy as to why such a structural retrogression occurred. The three important facts that this debate revealed were (a) the dependence of corporate profitability on intervention, especially the continuous "administering" of prices at which the government procured products of the corporate sector; and (b) the intensely monopolistic nature that accumulation (both in farm and industry) in India had come to acquire and; (c) that this monopolistic nature seemed to derive directly out of the unidirectional character of intervention. This was the context in which a second set of interventionist mechanisms were being planned since the mid sixties . This second round, with its rather formidable institutional character, sought to reverse this essentially unidirectional nature. However, despite certain temporary factors that facilitated the extension of intervention, the Indian State remained largely incapable of enforcing these extended mechanisms of control. I will argue that the reasons behind this inability lie in political contingencies generated by the tension between accumulation and legitimation. It is this argument that I take up in this chapter. First, I will reconstruct the debate concerning structural retrogression and failure of the first round of interventions. 140 Next, I will discuss if and how, the original constraints on state autonomy had consolidates or weakened between the first and the second phases. This would characterize the context in which the second phase of intervention is undertaken. Finally, I will show how the failure of the second phase in achieving reciprocity needs to be seen as a consequence of the constraints which evolved during the first phase. FAILURE OF INTERVENTION IN THE FIRST PHASE By the close of the sixties, the Indian economy showed signs of a "structural retrogression" manifested in a continued fall in the rate of industrial growth (see Table 5.1). Table 5.1: Deceleration of Growth Rates in The Industrial Sector, 1960—75 Industry Group Weights (1961=100) 1960-65 1965-70 1970-75 Basic Ind. 25.11 10.4 6.2 5.2 Capital Goods 11.76 9.5 -1.7 5.1 Intermediate Goods 25.88 7.0 2.5 2.6 Consumer goods 37.25 5.0 3.9 1.6 a.Durables 5.68 10.7 8.4 2.4 b. Non-durables 31.57 3.8 2.7 1.5 Source: Nayyar 1978:1269 While on the one the hand, the achieved growth rates fell constantly short of the targeted growth rates, on the other hand, studies revealed that the planners' goals to restrict the concentration of economic power were being systematically violated. The emergence of the dual problem of growth and equity prompted substantial state action in this period. Politically, the most important explanation for the structural retrogression came from the Planning Commission as 141 well as Congress' own rank and file. It saw a direct connection between the two problems of growth and equity: the failure of planning to affect the behavior of the private sector, especially its monopoly faction, led to the concentration incomes in the hands of the upper middle classes. This resulted in a skewed consumption demand— conentrated in favor of "luxury" or non-essential goods rather than mass consumption products. This in turn created a situation where industry found it profitable to cater to a small but affluent section of consumers who sought particular goods at relatively high prices; thus a relatively high level of profitability could be achieved without continuously expanding production. In fact, the levels of profitability were augmented by maintaining a constant degree of "scarcity" in the economy. In this situation, when the State wishes to set in motion an expansive process, it must guarantee (even) higher levels of profitability by providing fiscal and monetary concessions on the one hand, and generating additional demand on the other. In other words, the State must allocate increasing shares of public investment toward accumulation. In India, a major instrument for stimulating demand artificially through public investment constituted fixed capital formation in the public sector. This generated the major share of the demand from the privately-owned capital goods sector.1 Without such 'some estimates suggest that fixed capital formation in the public sector at 1970-71 prices grew at an annual rate of 11.3 per cent whereas in the period since 1966-67 has dropped to about 5.5 per cent. Some authors estimate that the responsive 142 sustained demand-generating policies, industry (especially sectors that are heavily state-supported), are motivated to curtail production once public demand falls (Mirrlees 1968:63- 82; Bagchi 1972:181). Up until the mid-sixties the State had indeed supported accumulation through the measures mentioned above, and industry had experienced considerable growth.2 Since the mid-sixties, the critics argued, the withdrawal of public investment away from industry (and toward agriculture) had brought about a reduction in demand, and hence in industrial growth. In other words, this was the response of industrial capital, dominated by the of private investment to public investment in India is remarkably high— about 0.73. This implies that every dollar of public investment generates 73 cents worth of additional private demand. This observation obviously contradicts the neo-liberal idea of government investment crowding out private investment (Bardhan 1984:25). 2This had been particularly the case under the brief prime ministership of Lai Bahadur Shastri between Nehru's death in 1964 and his own death in 1966. He was quite effective, even in this brief interregnum to liberalize the economy by liberalization of imports, licensing and other regulations, as well as a serious restructuring of the Planning Commission so as to considerably reduce its power. With strong support from the private sector, he was also able to negotiate successfully with the US for a greater flow of assistance, in exchange for a US/IBRD program of agricultural mechanization and devaluation of the rupee. These plans enjoyed great support from the largest factions of industrial and agrarian capital and according to some authors marked the "most significant episode in the shift of Indian economic policies towards a greater and more sophisticated reliance on the market mechanism" (Bhagwati & Desai 1970:477). Sastri could not carry out these reforms because of his untimely death. Mrs.Gandhi, who succeeded him, carried them out under the immediate political and economic pressures, and an uncertain power base of her own. As we discuss below, she was quick to reverse the "liberal” trends implied by them. 143 monopolistic faction, to the State's decision to patronize agri culture at the expense of industry. This was believed to be reflected in the severe imbalance of profitability of the two sectors during this period (Planning Commission 1968; Reserve Bank of India 1969; Mirrlees 1968:63-82; Bagchi 1972:181; Mitra 1977; Nayyar 1978; Bardhan 1984). Table 5.2 Farm Procurement Prices and Profitability Ratios between 1967-68 to 1971-72* State Procurement Prices Profits per cent as % of costs of production Haryana 200.56 57.6 Punjab 200.01 - 400 51.2 to 89.1 Uttar Pradesh 205.21 - 400 0.1 to 72.0 a. Data is only for wheat and the northern regions, since these two were the major beneficiaries of the NAS Source: Mitra, chapter 9; compiled from Table 9:2 and 9:8 As the contrast between Tables 5.2 and 5.3 (see next page) should indicate, the difference in profitability is quite substantial. The rate of profit in the corporate sector could not return to the 1960-61 level before the mid-seventies. The problem here is to relate this stagnant nature of the rate of profit systematically with the way in intervention affected the profit motive. In other words, was the corporate sector not earning profits because the State withdrew investment? Or did 144 the private sector seriously seek to increase the profit, as long as a certain level was guaranteed through state intervention?3 Table 5.3 Indices of Profitability in the Private corporate Sector: 1960-61 to 1986-87 Year Profits after Tax as % of net worth Year Profits after Tax as % of net worth Year Profits after Tax as f t of net worth 1960-61 11.1 1971-72 10.8 1980-81 14.6 1961-62 10.0 1970-71 10.0 1981-82 13.4 1962-63 8.7 1972-73 10.4 1982-83 11.6 1963-64 9.4 1973-74 11.6 1983-84 6.8 1964-65 9.3 1974-75 13.7 1984-85 7.5 1965-66 8.8 1975-76 8.2 1985-86 8.3 1966-67 9.1 1976-77 7.9 1986-87 5.4 1967-68 7.3 1977-78 8.8 1968-69 6.9 1978-79 11.5 1969-70 9.5 1979-80 14.5 Source : Sandesara 1992, Table 6.7 The evidence in support of the impact of intervention in strengthening the monopolistic tendencies of accumulation by altering the profit motive came from several contemporary documents.4 In 1966 the first report of the Industrial Licensing 3{Note that the profit shown here is a per cent of net worth. This implies that to maintain a steady profit rate, the net worth and the total profits have to increase at a steady rate simultaneously. If increases in total profits are being generated in a situation of low demand and stagnant sales, then they must be generated through institutional means, i.e., through price distortions, through maintaining artificial scarcity etc. In other words, in such a situation profits come to consist of "rents" along with "economic profits". We cannot postulate the proportional share of rents and economic profits without additional data. But wherever intervention exists, it can be postulated that rents are greater than zero. The question then is to determine how this rent is historically distributed between business and the State. 145 & Monopolies Inquiries Commission was published; the Report brought into focus the significant growth of assets experienced by the Indian private sector since 1951 (Report of the Monopo lies Inquiry Commission, 1968). The Commission observed that only a few conglomerates controlled most of the non-governmental companies in different sectors of the economy. For indicating different degrees of control, the Report distinguished between three possible components of a conglomerate, namely, the Inner Circle, the Outer Circle and the Complex. The Inner Circle consisted of those companies over which the conglomerate in question had direct and effective control, and its financial stake was more that 49 per cent. The Outer Circle consisted enterprises in which the conglomerate had "a voice and a material influence but not the authority of ultimate control". The financial control of the House in Outer Circle companies was less than 49 per cent. The Complex was defined as the union of the Jnner Circle and the Outer Circle (Hazari 1966:7). Using these definitions, the Inquiry Commission con cluded that: the four top Inner Circles increased their ownership of share-capital of the non governmental public companies from 17.91 per cent in 1951 to 22.34 per cent in 1958. The 4Mehta Ashok, Who Owns India, 1950; Hazari, R.K., The Structure of the Corporate Private sector - A Study of Concentration, Ownership and Control, 1966; India, Planning Commission, Committee on Distribution of Income and Levels of Living (Mahalanobis Committee), 1964; India, Monopolies Inquiry Commission: Report (MIC), 1965; and India, Report of the Industrial Licensing Policy Inquiry Committee (ILPIC), 1969, have discussed the concept of concentration. For a discussion on the evolution of the concept see: Goyal, S.K., Monopoly Capital and Public Policy, Allied Publishers, 1979, Chapter III. 146 comparable ratio for the Complexes went up from 21.85 per cent to 26.60 per cent. In 1958, the two largest Complexes, Tata and Birla, had nearly one-fifth of the gross capital stock of all non-government public companies" (Hazari 1966:48). Further, the Report showed that between 1951 to 1958, the gross capital stocks of companies controlled by the top four Congplex- es, Tata, Birla, Martin Burn and Jains, had increased by 100 per cent (Bagchi 1967:321-2). A similar trend of increasing monopolization has been observed with respect to the period between 1958 and 1966 as well (Hazari 1966:47-52). In fact the growth of the conglomerates had reached such proportions that it had begun to hurt the interests of capital itself. This was indicated by the fact that the top five conglomerates virtually owned the top five banks, and that 75 per cent of the country's privately held stocks were owned by 1 per cent of the country's households in 1966.5 This resulted in a situation where those who controlled capital had no inducement to invest and those who wanted to invest suffered from a capital constraint. The commercial banks not only diverted capital to those conglom erates who held bank shares, but also to particular non industrial activities at particular points of time. Driven by the obvious motive of profiteering, the commercial banks channeled an increasing share of credit towards trading and speculative activities, rather than industry.6 As a 5 (Mahalanobis Committee Report 1966, cited in Memorandum, op.cit. 202). 147 business houses, even the other oligopolists suffered from the lack of investible capital (Minutes of the Symposium on Bank Nationalization 1971:203). In a series of speeches between 1967 and 1969, the Deputy Chairman of the Planning Commission, Dr.D.R Gadgil enunciated the mutually reinforcing relationship between unidirectional intervention and growing monopolization in India: All growth of modern industry in India since the early twenties has been brought about under a protective regime. In planned industrialization, protection is continued in a variety of ways, and the plan is articulated through selecting particular capitalists for particular fields and en abling them to acquire highly scarce resources of every type. Whatever the financial skill of the capitalist his success and progress are mainly created by state policy and maintained at public cost. Even so no attempt is made by the government to acquire control, to introduce an element of public ownership, or even to do anything to facilitate such a process in the future. Accumulation of gains and the rapid increase of economic resources and power in particular private hands can ' thus be described as a deliberate objective of state policy... Almost all government operation is based on the offer of incentives to private capital without requiring performance in return (Gadgil 1972:405). The Commission's main concern at this point was that monopolization, as it had come to characterize Indian industry, ®While this went against the interests of industrial growth, it suited the financial interest of particular capitalists very well. Speculative trading in agricultural commodities continue to be an important element of primitive accumulation in India, and primitive accumulation co-exists with accumulation till the present. 148 other allocative decisions taken by the administration in their favor (Gadgil 1966, cited in Desai 1979:78). The underlying problem in the model, the planners held, was a singular reliance of the state on the private sector for capital accumulation without having the ability to direct its production and/or investment. An expert appointed by the Planning Commis sion stated: As regards the choice of instruments Indian planning seems to have relied largely on the certain financial allocations, fortified by a mass of administrative decisions. These are fairly blunt instruments if one considers the nature of the job being attempted..we have hardly developed mechanisms to influence decisions within the private sector so that they conform to national priorities.. (Chakravarty, S., Member, Planning Commission, in Plans and Prospects, Government of India, 1967). The criticisms were also echoed from within the Congress' own rank and file. The Congress Forum for Socialist Action (CFSA) launched an attack on the private sector questioning the legitimate role of large business houses, and recommending the State to exert control over the growth and expansion of monopoly houses (CFSA 1969:27-31). A series of far-reaching changes were recommended by the CFSA on the basis of the 1969 Report of the Industrial Licensing Policy Inquiry Committee. The major amongst these were the nationalization of selected private enterprises that had come to command huge resources, the nationalization of commercial banks that were under the control of individual monopolists, and the takeover of foreign multinationals, especially in the lucrative consumer goods products (CFSA 1969:32). 149 These critiques from within the ruling party Itself as well as the Planning Commission necessitated a response, particularly because they came in the context of the worsening economic conditions. Before discussing the response itself, let us briefly examine the factors constraining or advancing state autonomy. PROBLEMS AND PROSPECTS OF STATE AUTONOMY Most importantly, there was a realization amongst the capitalists themselves that the State required some degree of relative autonomy in order to sustain the process of accumulation in the presence of monopolists.7 However, the possibility of exercising his kind of relative autonomy was limited by the constraints on instrumental autonomy which had strengthened between the first and second phases of intervention. First, corporate financing of elections campaigns and other expenses of the political parties had greatly increased over this period. In 1967, the Congress is reported to have collected 74.72 per cent of its funds from the top four conglomerates belonging to the Tatas, the Birlas, the Khataus and Martin Burn Ltd. In 1968, it was reported that the top 126 companies contributed a total sum of Rs. 10,000,000 ($1,000,000 at the 1966 exchange rate) to political parties, including the Congress and the opposition parties. The two largest 7This is relative autonomy in the sense of early Poulantzas: in order for the State to secure the general and longrun interests of the dominant class, it needs to acquire freedom of action with regard to particular and short-run interests of individual factions of the dominant class (Poulantzas 1973). 150 conglomerates, the Tatas and the Birlas, contributed 34 per cent of this total sum which went to the Congress' exchequer. The Government of India's own study in 1968 showed that between 1962 and 1968 companies officially contributed Rs.25,970,797 ($2.5 billion at the 1960 exchange rate) to forty seven political parties (including independent candidates). The most significant recipient was the Congress Party, which received Rs 20,552,798 (approximately 80 per cent); the other forty-six parties received the remaining 20 per cent of the total contribution (Bambhri 1968:760-79). Second, by this time the industrialists or their appointed executives had regularly begun to contest elections to the Lower House of the Parliament (Bambhri 1982:151). Those who won, were important representatives of the "business view" in the Parliament (Kochanek 1970:356). Third, a number of informal linkages, between the top industrialists, and Cabinet members had consolidated themselves over the ten years of planning (Kochanek 1970:274-5). These translated into at least two kinds of palpable gains for particular businessmen: channeling of investment funds from government financial institutions, and the granting of industrial licenses in a manner that contradicted the goals of licensing both in terms of equity and efficiency.8 8Several Committees were set up at this time, enquiring into particular cases of investment by public financial institutions. The Vivian Bose Commission's investigation of the government owned Life Insurance Corporation's investment in the Mundhra group was a case in point. The Report of the Vivian Bose Commission was also the first systematic inquiry into the 151 As reflected in the complaints of the Planning Commission, the hardening of constraints on instrumental autonomy encroached upon the autonomy (insulation) of the bureaucracy. At one level, the bureaucracy became less and less capable of executing the regulatory instruments in the face of these constraints; at a more fundamental level, the Planning Commission became incapable of developing a plan or a policy framework without political interference (Gadgil 1972:356). In a situation of continuous consolidation of capital, the linkages between state and capital thus created the type of "embeddedness" more conducive to restricting rather than advancing autonomy. It is also necessary to derive the implications of the above in terms of structural autonomy, defined as the type of autonomy required by the State to transcend the extant structure. The hardening of the structure, reflected in the consolidation of the capitalist class, becomes a constraint on the structural autonomy of the State. The State perceives this constraint only when, and to the extent that it is committed to the task of transcending the structure. As we discussed above, a temporary weakening of the dominant classes would increase structural autonomy; however, whether such possibilities are seized upon by the State, depends on the commitment of the State to structural change. This problem, of being able to use of informal linkages by the private sector to circumvent policy (Bambhri 1970). 152 compose state action into State's intentions versus the impact of constraints - assumes a greater complexity in the case of India, particularly because of the factionalized nature of the "state". Exactly as in the first phase of intervention, the inten tions behind the second phase were cast in terms of the goal of a socialist transformation. Despite all evidence to the contrary, the ruling party managed to lend some credence to the socialist goal declared at Independence, by splitting over the issue of nationalization of the banking system. The central question at stake was to the extent to which nationalization would bring about "social control" over private activity. The more conservative faction of the party saw this as "an over extension of the public element of the mixed-economy approach to the extent where it does not co-exist but takeover the private element". The Congress Socialist Forum, under the leadership of the Prime Minister Mrs. Gandhi saw this as "a necessary step in reinforcing the socialistic principles of society that we must continue to uphold". "This conflict, Mrs. Gandhi wrote in an open letter to the Congress, "is not between personalities, or power, or over strategies"..."This conflict is one between those who are for socialism, and those who are not.." (The Statesman, November 12,1969). Shortly after, the Working Committee of the Congress was reappointed, including for the first time since Independence, members directly associated with the Communist Party of India. 153 At the political resolution adopted by the Congress in 1970, the party President officially invited "all progressive forces committed to the ideology of socialism" to join the Party {Frankel 1978:433). After 1969, large numbers of the former members of the Communist Party of India did join the Congress Party. As some authors argue, this split between the conservative and radical factions of the Congress, and the alliance of the radical faction with the left parties re established the left as an important element of the Congress (Frankel 1978:433).* The regime sought structural autonomy in two other important ways: first, by attempting to better its alliance with the Soviet Union and second, by extending patronage to the farm sector. The former can be interpreted as an attempt by the State to extricate itself from the structural constraints at the *This is however, not the only interpretation of Mrs.Gandhi's decision to ally with the Left. Many have interpreted this as a deliberate effort to internalize leftist politics within the Congress so as to contain the growing popularity of the Left around this time (Chandra 1984). In general, Mrs.Gandhi's efforts to ally with the Left seemed to further her own goals of gaining greater structural autonomy vis-a-vis domestic capital, since her political agenda at this point comprised of two goals quite opposed to its interest. For one, she wanted to extend patronage to the farm sector in order to mollify the intense legitimation needs generated by the growth of rural immiserization. Second, she sought to rejuvenate her role in the Non-alignment Movement (NAM) to advance her position at the global level. The reason why these were of topmost importance at this point, was a serious effort to weaken the influence of corporate capital on policy decisions. In reality, while Mrs.Gandhi took up an active role in the NAM, she also attempted to better its alliance with Soviet Russia. 154 global level (Nayyar 1971). Inside the country, the growing consensus for dislodging some of the foreign multinationals reinforced the credibility of this attempt (Encarnation 1990:256). Extending its alliance with the Soviet Union was also significant in an indirect way in leaving the private sector out of these loan agreements, so that they could be used for legitimation measures, or for the development of heavy industry. The problem here was that the US was not ready to lend for any of these efforts. To illustrate this point, let me briefly discuss the history of this tripartite relationship between the US and the Indian Governments and Indian domestic capital. While India had managed to obtain significant amounts of foreign funding from the US, and other US-dominated institutions like the IBRD, the IFC etc., these institutions had always been reluctant to finance projects in the public sector. It was at Although the Bank had shown interest in financing key industries like steel, there was serious disagreement between the bank and the Indian government as to the role of the public sector. Assistance from the Bank actually became available to the Tatas, where the primary role of the Bank was to mediate in order to help the Indian company raise capital in North American market for the first time since World War II. The next important step in this relationship was the Bank's initiative in mobilizing the Indian private sector to establish the Industrial Credit and Investment Corporation of India (ICICI). On the suggestion of the Bank, a steering committee consisting of prominent Indian businessmen was set up 155 to draft a charter "for the establishment of a corporation to finance existing and new industries through loans and equity participation and also provide technical and managerial advice to private business ventures" (cited in Bambhri 1970:8). This culminated in the origin of the ICICI in March 1955 with a $10 million loan from the Bank to meet foreign exchange requirements of the borrowers. By 1962-3, the Bank noted that ICICI had mobilized capital, both domestic and foreign, to tune of $650 million which was about five times its own investment. The International Finance Corporation (IFC) was also another major financier of privately owned projects in India. During its twenty years of operation, the IFC invested in India a total of $584 million and involved eleven important industries in a triangular relationship between IFC, Indian entrepreneurs and foreign investors. IFC's biggest investment was in its loan and equity participation in a fertilizer plant with majority ownership by one of the largest industrial Houses in India, that of the Birlas. Other similar loans were advanced to the Imperial Chemical Industries of UK, the House of Kirloskars, the Mahindras etc. In each case, IFC's primary role was as a catalytic agent in mobilizing capital from North America and the various investors in Europe. By 1966-67, India's dependence on foreign assistance for project financing was acute. The State, while having and initiated and participated actively in conjunction with large domestic capital to solicit the involvement of foreign capital, 156 found itself in an increasingly weakening position in this triangle. This was revealed best in the crises on 1967-8, which derived out of the severe droughts of 1965-66 and 1966-67. The Economic Survey of 1967-68 admitted that "The balance of payments continued to be under pressure because the burden of debt-servicing and import requirements which could not be financed from foreign assistance". It was at this point that the USSR agreed to finance projects in India for the first time, with a loan of $1.5 billion, although the rest of the required $7.4 billion was still to be raised from the World Bank and other Consortia countries (Planning Commission, Twenty-third Meeting Summary Record, 1966, p 2), with which the State decided to assist the agricultural sector. The decision to ally with the farm sector was also an important source of the State's attempt at asserting its relative structural autonomy at the local level.10 However, several contradictions characterized these attempts of the State. First, at the same time that it was trying to align with the Soviet Union, the Green Revolution was being funded entirely by the US. This resulted in a problem of credibility with respect to both these donors, so that the State had to continuously oscillate between a pro-socialist and a pro 10This is relative autonomy in the sense of early Poulantzas: in order for the State to secure the general and longrun interests of the dominant class, it needs to acquire freedom of action with regard to particular and short-run interests of individual factions of the dominant class (Poulantzas 1973). 157 capitalist rhetoric. Second, at the same time that it was endorsing socialism, and projecting its agricultural strategy as a fight against poverty, there was strong evidence that much of the gains from this effort was monopolized by the largest sections of the rural oligarchy: Admittedly in the areas covered by the NAS, some improvement in the level of rural wages has taken place; this has however, been more than neutralized in most instances by the all-round increase in prices, including the prices of foodgrains. .. In sum, while the shift in terms of trade has implied a shift in real incomes in favor of the farm sector as an aggregate vis-a- vis the rest of the nation, the resulting gains have been exclusively monopolized by the surplus-raising farmers and their trading partners; landless laborers and small farmers, who are net purchasers of grains from the market, have been adversely affected by the rise in farm prices as the non-agricultural prices in general (Mitra 1979:120). With hindsight, it is difficult to argue that the regime sought serious structural change at that point. One can conclude however, that it sought to use the threat of structural change to temporarily enhance its bargaining power. Thus, while the State was able to enforce the establishment of a number of mechanisms to control the behavior of capital, it also accepted the demand from industry that it was necessary to reverse the direction of public investment away from the agrarian sector. This perhaps confirms our view that the State did not actually seek structural change. The expansion of the interventionist mechanism was, at that point in time, important for restoring a 158 certain degree of instrumental autonomy in the face of increasing degrees of "soft" embeddedness. As a result of this expansion that took place within the context of a threat of structural change, the bureaucracy could also gain some degree of insulation in the development and execution of plans during the period that followed. The evidence of a continued failure of intervention since 1970, and the continued ability of the monopoly faction to use state resources to further its own goals suggests the limitations of these attempts at control. With the bank nationalizations in 1970, the anti-trust legislations of 1969 and the setting up of the Dept, of Company Affairs under the Ministry of Finance in 1969, the State created for itself the same institutional framework with which Korea implemented her policy of reciprocal intervention. In what follows, we show that despite these institutional resources, the Indian State could not enforce reciprocity. INTERVENTION FOR CONTROL OF CREDIT:A PREVENTIVE EFFORT Like Korea, the Indian state also attempted to control the conglomerates. There were primarily two elements of this control: the attempt to nationalize credit and to legislate directly against monopoly. Here we briefly discuss these two aspects. Before going into that discussion, one comment is in order. While both Korea and India attempted to control 159 conglomerates, they did so for different reasons. Korea's main concern was to ensure that monopolistic accumulation did not prevent growth; in that sense, the Korean regime, sought to and succeeded in preventing precisely the kind of crisis that occurred in India. Protecting the pace of accumulation was crucial in Korea because of the model of legitimacy it embraced. This model was dependent entirely on accumulation for the purpose of legitimation, and hence for obtaining legitimacy of an otherwise illegitimate regime (Wade 1990:31-2). In India, the control of conglomerates was cast more in the rhetoric of preventing the concentration of wealth, rather than as a requirement for accumulation. Hence the very act of establishing these mechanisms of control were important from the perspective of the State than their actual enforcement. Part of the difference in the efficacy of these mechanisms may therefore be explained by the differences in the models of legitimacy in which they were embedded (Bardhan 1984). We discussed above how the underlying aim of the nationalization program was to restore the pace of accumulation by rescuing it from the dictates of the monopoly faction. It did this primarily by restoring the small saver's confidence on the banking system (Memorandum of the All India Bank Employees' Association 1970:1-3). First, the nationalization was able to mobilize household savings in a situation of increasing capital scarcity. Second, public control of credit (of which the bank nationalization program is a part) has been able to achieve 160 goals other than those of accumulation (rural development, extension of social services, etc.).11 In this case, the State did attempt to device certain measures of what we called ex-ante reciprocity (Chapter 3). Substantial financial participation by State institutions would require that state officials be represented in the Board of Directors of the debtor corporations. This representation, it was expected, would enable the State to influence corporate decisions — most importantly, to ensure some degree of a regularity of repayment of public money (Guidelines for the Sanction & Disbursement of Financial Assistance, Reserve Bank of India, 1973: Appendix A). Table 5.4 shows the distribution of the 204 largest companies according to the extent of capital obtained from the public sector institutions as credit. Such availability of state financing has systematically reduced the necessity of the large firms to go the capital market obtaining investible capital; rather the state-owned commercial banks and financial institutions became a source of cheap capital at regulated rates of interest and continuously negotiable repayment schedules (World Bank 1992:85-9). nSingh Prabhu, N. The Role of Development Banking in A Planned Economy, 161 Table 5.4 The Distribution of Companies owned by Conglomerates according to the Share of Public Sector in Total Credit Employed Percentage Share of Public Sector (%) 0-5 5-10 10-25 25-50 50+ total 1 2 3 4 5 6 7 1. Birla 1 1 7 6 1 16 2. Tata 3 - 2 10 - 15 3. J K Sin. 1 - 1 1 - 3 4. Mafatlal 1 - 4 2 - 7 5. Thapar - - 2 - - 2 6. Modi - 1 1 3 - 5 7. A C C - - - 1 - 1 8. Bangur - - - 7 2 9 9 . L t T - - - 1 - 1 10. Sarabhai - - - 1 - 1 11. Baj aj 1 - 2 - - 3 12. I C I 1 - 1 2 - 4 13. Mahindra 1 - 1 2 - 4 14. Shriram - - - 1 - 1 15. Walchand - - - 1 - 1 16. Kirlsokar 1 _ 1 3 _ 5 17. r t c - - - 3 - 3 18. T V S - - 1 - - 1 19. H iever - 1 1 - - 2 20. Others 7 4 25 24 6 66 21. Foreign Controlled Cos. 4 4 18 11 - 37 22.Other Companies 1 1 5 7 3 17 Total 22 12 72 86 12 204 S o u r c e : Institute for Studies i n I n d u s t r i a l Development ( I S I D ) , Hew D e l h i . T h i s a n a l y s i s i s b a s e d o n t h e S h a r e D i s t r i b u t i o n S c h e d u l e s o b t a i n e d f r o m t h e c o m p a n ie s . F o r p u r p o s e s o f o b t a i n i n g t h e P u b l i c S e c t o r s h a r e , t h e s h a r e h o l d i n g s o f i n s u r a n c e c o m p a n ie s , t e r m l e n d i n g i n s t i t u t i o n s , U T I, n a t i o n a l i z e d b a n k s , C e n t r a l & S t a t e g o v e r n m e n ts a n d g o v e r n m e n t c o m p a n ie s h a v e b e e n c l u b b e d t o g e t h e r . Amongst the 204 companies funded by public money, in 86 companies the stake of the public sector financial institutions in risk capital was more than 25 per cent. Amongst the units 162 financed, the number of companies of the Birlas and the Tatas (the top two conglomerates in the country) was the highest. Note further that the public financial institutions had the largest stake in these projects, whereas the members of the Boards of Directors of these companies had only marginal stake. But since public money goes into these projects in the form of credit rather than equity, management and financial control is retained by the Board of Directors of the conglomerates. Table 5.5 shows the distribution of companies (belonging to this sample of 204 companies) according to the extent of direct interest of the Board of Directors and their relatives (see Table 5.5 on page 123). The contrast between Table 5.4 and Table 5.5 shows that in some of the companies owned by the conglomerates, the Board of Directors and their relatives bore a very small percentage of the financial stake. The rest was financed either through market capitalization or by the state. Despite the considerably larger share of the State in risk capital, the State did not obtain any management control (Goyal 1991:23). There are at least two reasons as to why The Board of Directors could maintain management control without contributing a high share of risk capital. First, as I mentioned above, much of the state financing was in the form of debt rather than equity, so that continuous negotiations for debt repayment was possible. The problem was aggravated by the fact that the financial institutions were unwilling and unable to enforce payment 163 discipline as a commercial bank would have. Second, each loan was obtained separately for companies/projects that make up the conglomerate. So even if the Board of Directors of the bear little stake in any single company, they are still able to exert management control on these companies through their financial control of the conglomerate as a whole. The most important aspect of the State's absence of control in these companies even where it supplied a large share of the investible capital, is that the State could not have any say in the direction of the investments that occurred. Yet, this was precisely how the State justified financing large corporate sector projects: to be able to navigate the course of accumulation (Planning Commission 1970:1-5). Neither could the State have any say on the technology policies of these private firms, or on the choice of foreign collaborators, if such collaboration violated the stated national priorities of the time (Goyal 1991:23-5). As the Tables indicate, this pattern of financing of selected companies belonging to conglomerates, became quite common in the seventies and eighties (See Table 5.6 on page 124). Ironically, this was both despite and because of the centralized control on credit that came with the nationalization program. The Reserve Bank of India's Reports on Currency and Finance of 1992 shows that the outstanding public credit to the large corporate sector been increasing steadily throughout the eighties. Starting from a level of Rs.2 million in 1980, it was 164 standing at Rs. 50 billion in 1992 which is about the same as India's foreign debt (RBI 1992:74-5) .12 The provision to exchange debt for equity up to (a maximum) of 20 per cent of the total outstanding debt has to date not been enforced (Vanaik 1989:45). Some estimates indicate borrowings from public financial institutions (including commercial banks) came to constitute on an average about 77 percent of the total financing for the large corporate sector over the period 1960-61 to 1976-77;13 between the period of 1981-1990 it came down to an average of 44 percent (See Table 5.6). Even with this substantial investment in the corporate sector, it did not increase state power. The comparable figure for Korea during the height of its interventionist period varied between 30 and 60 per cent, and still gave the state sub stantially higher degrees of autonomy, especially of the embedded type (Chang 1987:120 and 177). One reason for this may lie in the deliberate distortion of curb market interest rates by the Korean State. The Indian state by contrast, made cheap credit available to the large sector, but did not distort the curb market rates. As such, project financing did not give the State as much bargaining power as it did in Korea. 12The average rate of inflation during this period has varied between 11% to 13% (Economic Survey, 1993:74). 13Reserve Bank of India estimates on Financing of Large & Medium Scale Enterprises, various issues, cited in Mitra 1977. 165 However, the significant presence of public credit, and the convertibility clause - along with the representation of the government in corporate Board of Directors, are mechanisms through the State could potentially use its embeddedness for offsetting the constraints on its autonomy. However, the "soft” character of embeddedness - manifested in the intricate personal, social and psychological linkages which in a very fundamental yet intangible sense bind the members of the political and economic elite together— far exceeds the "hard" embeddedness that derives out of the institutional mechanisms outlined above. It can be also be argued that in its relationships with the State, capital also shows a preference for drawing upon the mechanisms of soft embeddedness rather than the conventional methods of direct/indirect threats posed by capital such as investment withdrawal, capital flight etc. The collaborative relationship (as opposed to crude instrumentalism or the liberal idea of conflict) that characterizes the Indian polity is based precisely on the dexterity with which soft embeddedness is made use of. This should explain why the Indian State not only does not discipline or punish as a developmental State would, but it devices ways in which its choice not to discipline is justified. Arguably, this goes beyond unidirectionalism in the simple inability to make capital comply; it indicates a conscious 166 preference for unidirectionalism as a strategic response to limits on state autonomy.1* ANTI-MONOPOLY INTERVENTION: A CURATIVE EFFORT At the close of the sixties, the regime had to respond to the problem of growing monopolization both for the purposes of accumulation and legitimation. As a first step, the new licens ing policy announced in February 1970 entirely reversed the trend toward decontrol of industries that started during the mid-sixties and endorsed by the draft outline of the Fourth 14In this sense, the sick industry policy of the State adopted since the mid-eighties is such a justification for its choice to not exercise its autonomy with respect to the private use of public money. Initiated by the private sector, this rhetoric is based on the premise that "sickness" - defined as the inability of the firms to break-even (and hence to repay loans) is an effect of the inefficiencies generated by the system of controls (Memorandum to the Ministry of Industry from the Federation of the Indian Chambers of Commerce and Industry, 1976: 1-13). A series of such complaints from various private sector bodies culminated in the creation of the Industrial Reconstruction Bureau of India (IRBI), the prime responsibility of which is to design "rehabilitation packages" for the firms which report themselves sick. The rehabilitation package consists of various financial and fiscal incentives and are designed to bring the sick firms to their break-even levels within the short or medium term. In the case that the projected rehabilitation program does not help firms to break-even in the medium/short term, the sick units are absorbed in the public sector or amalgamated with other profit making companies, very often belonging to the same conglomerate. Unlike in Korea, there is no requirement that the conglomerates finance the "sickness" of its firms by deploying profits of the other firms. In other words, going "sick" has turned out to be a lucra tive deal for most firms. This largely explains the phenomenal growth of sickness in the private sector: during the eighties sickness has been rising at an average rate of 19 per cent per annum (Goswami Committee Report, July 1993). The outstanding credit to sick private units has risen from Rs. 20 billion to Rs. 90 billion, an increase of 18.4 per cent compound per year between 1982 to 1989. Almost 75 per cent of this credit is locked up in sick large and medium private firms. 167 Plan. All previous exemptions (of 41 industries) from licensing requirements were withdrawn, and large Houses had to be registered by a special division of the Department of Company Affairs - so that applications from these houses for new undertakings could be specially screened. The government proposed to apply specific restrictions on companies belonging the dominant Undertakings1^, Large Houses16 and to foreign firms and their subsidiaries. Firms belonging to any of these categories were normally to be confined to heavy investment sectors, requiring outlays of Rs. 5 crore and above. In addition, the government accepted the requirement that public financial institutions providing major assistance to public sector firms would be in a position to convert debt into equity in case of non-repayment of debt (Fourth Five Year Plan 1970:307-9). It was also at this time that Monopoly and Restrictive Trade Practices (MRTP) Act was passed. Under this act, any company with assets of Rs. 20 crore or more was required to 15. A "dominant Undertaking" as defined by the MRTP Act of 1969, is one that "by itself or along with interconnected under takings produces, supplies or distributes or is otherwise connected with at least one-third of the total goods and services of any description produced, supplied and distributed or rendered in India (The MRTPA 1969 [1973]: 1) 16 16. "Large Houses" include "those business concerns over which a common authority holds power, and which in 1964 owned more than Rs. 5 crores in assets; large independent companies having assets more than Rs. 5 crores; and foreign companies and foreign subsidiaries (Report of the Industrial Licensing Policy Inquiry Committee ([Main Report]: 11-20). 168 submit their applications (for creation or expansion of capacity) to the Ministry of Company Affairs, so that there activities could be subjected to special scrutiny (Govt.of India 1973:1-2}. As the experience of the subsequent years show, the implementation of these legislations have not been possible. Table 5.7 and Table 5.8 show the growth of the top 20 conglom erates during 1972-90. The three periods 1972-1980, 1980-84 and 1984-90, indicate that the largest share of the growth of assets has accrued to the two top business houses. These two houses have managed to control about 40 per cent of the total assets of the private corporate sector between 1972 and 1990. The other houses have maintained their shares in the asset increase, and in some cases have registered a slight fall. Considered as a group, the share of the top twenty houses in the net corporate assets of the private sector has increased from 19.34 per cent to 25.13 per cent between 1958 and 1979 (Sandesara 1992:103, Table 6.6). 169 Table 5.7 Growth In Assets of Top Twenty Conglomerates, 1972-1984 Assets Share in Increase (Rs. Crores) (%) (1) 1972 1980 1984 (2) (3) 1972-80 (4) 1980- (5) 84 House Birla 589.42 1431.99 3359.04 18.48 23.32 Tata 641.93 1538.97 3120.13 19.67 19.13 J K Singhania 121.45 412.72 858.37 6.39 5.39 Mafatlal 183.74 427.54 786.60 5.35 4.35 Reliance* 166.33 672.96 3.65 6.13 Modi 58.05 198.82 610.30 3. 09 4.98 A C C 134.36 274.51 554.16 3.07 3.38 Bangur 125.26 264.33 508.84 3. 05 2.96 Larsen f i Toubro 79.03 216.03 480.79 3. 00 3.20 Sarabhai 84.44 317.94 462.88 5.12 1.75 Bajaj 63.32 179.26 425.97 2.54 2.99 I C I 135.21 343.01 425.52 4.56 1.00 Mahindra 58.49 186.03 408.17 2.80 2.69 Shriram 120.77 241.00 406.69 2.64 2.01 Walchand 99.47 150.36 405.31 1.12 3.08 Kirloskar 86.46 220.37 397.81 2.94 2.15 I T C 74.65 156.29 393.15 1.79 2.87 T V S Iyyengar 50.97 188.64 387.25 3.02 2.40 Hindustan Lever 77.87 219.30 381.81 3.10 1.97 Total 2921.05 7481.50 15744.80 100.00 100.01 Source:Based on replies to questions in Parliament. Note: The asset figures refer to only those companies which are registered under the MRTP Act, 1969. * This House emerged after 1972. 17 0 Table 5.8 Growth in Assets of Top Twenty Bouses, 1984-1990 House Assets Share in Increase (Rs. Crores) (%) 1990 1984 1984-90 (1) (2) (3) (4) Tata 8530.93 3120.13 20.20 Birla 8473.35 3359.04 19.09 Reliance 3600.27 672.96 10.93 Thapar 2177.15 699.35 5.52 J.K. Sing 2139.00 858.37 4.78 Larsen & T 1681.52 480.79 4.48 Modi 1399.37 610.30 2.95 Ba jaj 1391.06 425.97 3.60 Mafatlal 1343.35 786.60 2.08 SPIC 1273.35 272.00 3.74 Hindustan L 1209.46 381.81 3.09 United Brew 1189.24 262.00 3.46 T.V.S. Iyenger 1177.10 387.25 2.95 I.T.C. 965.13 393.15 2.14 Shri Ram 933.93 406.70 1.97 A.C.C. 902.72 654.16 0.93 Oswal Agro 870.34 + 3.25 Mahindra & M 773.55 161.00 1.36 Essar 756.49 2.22 Kirloskar 735.51 397.81 1.26 Total 41522.82 14737.562 100.00 Source: * Same as for Table 5.7 This is a new House. 171 Concentration In terms of particular products, which was already very high, also increased over this period (See Table 5.9) . Table 5.9 Concentration in the Indian Corporate Sector Four-Firm Concentration Ratio Industry 1973-74 1985-86 1990-1 Tea 36.6 45.2 30.5 Man-made 100.0 100. 0 100.0 fibre Industrial 92.0 97.0 99.0 Chemicals Automotive 55.7 54.1 61.1 Components Metals 94.3 94.3 94.0 Electrical 84.0 82.0 89.1 Machinery Transport 95.0 95.0 97.1 Equipment LCVs 80.8 78.4 80.1 Jeeps 100.0 100.0 100.0 Malted Foods 98.7 98.0 98.0 Soaps 85.0 94.0 n. a Industrial 100.0 84.2 n. a Yarn Source: CMIE, Markets and Market Shares, 1992-93 The constraints on state autonomy that led to the failure of anti-trust legislations can be identified as follows. First, the Monopoly and Restrictive Trade Practices (MRTP) Commission suffered from limited bureaucratic autonomy. The Commission had merely an advisory status; none of its recommendations were binding on either the government or the companies. Second, the Commission had no autonomy to initiate examination of possible cases of unfair trade practices based on its own research. Rather, it was dependent on the Department of Company Affairs (DGA) for referring cases that the latter deemed appropriate. As the following Table 5.10 shows, the percentage of cases 172 referred to the MRTP Commission by the Department has been minimal. Table 5.10 Relative Share of Casea Referred to the MRTP Commission By the Department of Company Affairs (DCA) Year Total No of Proposals Of which no. of proposals Received by the DCA referred to MRTP Comm. 1979 1639 3 1980 184 6 1981 250 6 1982 274 8 1983 284 7 1984 347 4 1985 325 Nil 1986 392 Nil 1987 Na Nil 1988 352 Nil Source: MRTP Commission Annual Reports, various issues. As we mentioned in Chapter 3, not only did the restrictions on concentration fail, the government also helped legalize the non-compliance of capital by endorsing capacities created in excess of licensed amounts. Much of these licensed capacities were not even being used for production, but for cornering of capacities in order to set up entry barriers for potential new entrants (Kochanek 1992;Mohan and Aggarwal 1990). This has been specially true of the large business houses (Goyal 1991:27). And yet, the same Dept, of Company Affairs which was established specifically for the purpose of controlling monopolistic growth, recommended that these abuses of capacity be legalized. The arguments given in each case of such post-hoc endorsement of capacity were provided by the firms 173 themselves, and routinely cited the necessity of economies of scale (Mani 1992:M-86 to M-94). SUMMARY AND CONCLUSIONS In the discussion above, we have tried to capture the main features of the State's attempts to control monopolistic accumulation by the conglomerates. He explained how this attempt at control failed, despite the State's success in establishing these control mechanisms. As we argued, these failures are systematic, rooted in the historical and structural characteristics of the context in which intervention was initiated. The prime characteristic of the context, as we discussed in Chapter 4, was an alliance between state and capital. This alliance put serious restrictions on state autonomy in various ways. At the first level, high degrees of soft embeddedness (which, in a circular fashion, fed into and arose out of the alliance) directly and substantially limited bureaucratic and instrumental autonomy. At the second level, soft embeddedness put limitations on structural autonomy, both directly and indirectly. The indirect limitations derive out of the first level (i.e through restrictions of bureaucratic and instrumental autonomy). The direct limitations on structural autonomy comes simply through the various linkages that obtains between the state and capital, which make it impossible for the State to independently decide on a program of structural change. I f a n d w h e n t h e S t a t e s e e k s s t r u c t u r a l c h a n g e , t h e c o n t e n t o f 174 the change is almost always decided upon jointly by state and capital, especially if soft embeddedness characterizes the moment of state formation. This requires us to modify somewhat the notion of constrained autonomy, and of course the notion of the autonomous state as the alternative to the instrumental state. It is no more merely a question of capital and state as being two separate entities putting constraints on each others projects. It is rather the case where a social entity comprising the political and the economic elite, emerges; albeit with separate goals, neither see the possibility of pursuing their goals outside of the alliance. From the point of view of the State, the goal is to find the optimal balance between legitimation and accumulation. Accumulation is not only necessary for gaining legitimacy from the perspective of business, it is also necessary for financing legitimation from the perspective of labor. The process of state formation also influences this exercise in various ways. In the Indian case, state formation was characterized by mass mobilization based on a distinctly socialist rhetoric. As such, irrespective of whether the State was unable (or unwilling) to enforce control on capital, the establishment of the mechanisms of control were very important for legitimation.17 In that sense, the regulations served as 17 Here we refer to legitimation in a broader sense than redistribution and state mediation on behalf of labor. We mean here also the intangible modes of legitimation, which in the 175 methods to establish public control on accumulation. In other words, the most important aspect of the State's motivation to control monopolistic accumulation was satisfied through the very development of these instruments. Implementational failures are most often attributed to an inefficient bureaucracy. However, if one considers the whole complex of linkages that we discussed in this and the previous chapter, it does seem that it is rather the limits on bureaucracy, set by soft embeddedness, that prevent implementation to a large part. The strength of these limits derive out of the fact that limits are actually limits on the State, and not simply on the bureaucracy. Since the State entered into the alliance with capital as a matter of strategy, these constraints are arguably self-imposed. Hence our characterization of the Indian State as self-constrained. Once a state chooses to impose such limitations on itself, it must become self-reflexive over time. As we have tried to show, as intervention evolves, some of the initial constraints may become solidified, since state intervention consciously chooses to strengthen the capitalist structure. So, whenever the State wishes to enforce control on business, it needs to take into account every initial constraint it had, as well as the constraints it creates for itself over time. The State's context of socialist rhetoric, implies restrictions on self- interested behavior by private agents. 176 actions (e.g design of control mechanisms with an in-built bias for capital, or those which enable the State to be particularistic, or the power with which the bureaucracy is vested to ensure implementation, etc.) must therefore be looked upon as responses to this complex situation. In other words, the State is required to be self-reflexive at every stage of intervention in order take account of its relationship between capital and labor, and its relative need for securing accumulation over legitimation or vice-versa. 177 Chapter 6 CONCLUSIONS India, like every other developing country, is now in the midst of a program of economic liberalization, the primary thrust of which is to dissolve state intervention in order to allow a greater play of market forces. Often discussed as a mere change in strategy, "liberalization" in fact emerges from within the broader philosophical resurgence of a neo-classical orthodoxy on a global scale, where free private enterprise, the laissez-faire state and the market constitute the motor of economic growth. The "liberalization model" holds as its primary assumption that state intervention has been singularly inimical to private enterprise, and as Buch, has been the primary obstacle to growth (Fukayama 1989). To be sure, there is empirical evidence from developing countries, have come to provide evidence that directly contradicts, as well as completely corroborates, the "failed statism" thesis on which the liberalization advocacy is based. On the one hand, we have evidence from East Asia which suggest that state intervention has been the central cause of growth; on the other hand, we have evidence from countries like India, where the state's role in engineering growth is indeed tainted. How then, does one reconcile these two contradictory set of evidences? 178 In this work I attempted such a reconciliation by analyzing state intervention in India using South Korea as a foil. Between 1960 and 1980, South Korea was at the same time the most interventionist of states as well as the fastest growing economy in the world. As has been demonstrated in various studies, intervention in South Korea consisted of all of the instruments that in other countries, such as India, have allegedly generated "rents’ ’ and other forms of inefficiencies. It is the rent-eroding capacity of economic liberalization that is believed to be the basis for the global consensus for 1ibera1ization.1 The experience of South Korea has clearly come to cast doubts on the theory that intervention, per se, is the obstacle to growth. The problem, as I tried to demonstrate here, lies not in intervention per se, but why and how intervention is motivated. Dissenting with the liberalization model, I argued that how intervention affects a Bociety cannot be separated from the question as to why intervention is originally undertaken. In particular, the answers to these two questions must be sought in the light of a complex state-capital relationship that characterizes each context in which intervention occurs.2 1 See Chapter I for a discussion on the rent issue. 2 0f course, the fact that the liberalization theorists argue that these two questions are to be seen in isolation is 179 As I tried to argue, this disciplining is not simply in the sense of preventing capital from committing certain acts and allowing certain others. This disciplining implies intervention in the most comprehensive sense possible: it encompasses all state action that attempts to suspend the autonomy of the economic subsystem from the political- administrative sub-systems (Habermas 1976; Offe 1984). Operationally, these attempts to develop a set of measures through which the State aids accumulation, supplemented by a set of measures through which it attempts to navigate the course of accumulation, so that national objectives, as defined by the state, are fulfilled. In the light of this definition, I characterized the difference between Indian and South Korean intervention as a difference between reciprocity and unidirectionaliam (Amsden 1989:68). In brief, reciprocity implies that the State supports the private sector to deploy public resources for private accumulation, but only under the condition that the State's growth objectives were fulfilled. By contrast, intervention in India has been unidirectional. Under this model, the State has deployed public resources to foster not a mere analytical issue; the act of seeing state activity in terms of technocratic efficiency represents in itself particular political and normative positions. As Habermas explains, this constitutes the difference between normative systems that see techno as opposed to praxis as the principles around which the public realm is organized (Habermas 1977). 1 8 0 accumulation, but has not been able to make capital behave according to pre-determined standards of behavior). In particular, while the monopolistic faction of capital have consistently defied the State's directives, the State has not replied by withdrawing its support to accumulation. The empirical exercises of Chapter 3 and Chapter 5 provide documentation to this effect. What explains then, the difference between the nature of intervention, as reflected in the differences between reciprocity and unidirectionalism? In answer to this question, I argued that intervention is unidirectional or reciprocal according as the degree of autonomy enjoyed by the State. In South Korea, the State is autonomous in the most comprehensive sense: it is endowed with the ability to determine the basic orientation of development without excessive interference from the dominant classes, and to implement programs appropriate for that orientation, even when they contradict dominant interests. In the contemporary literature on East Asia, such a state has come be known as the developmental State. It is a developmental State that can implement intervention so as to achieve pre-determined goals (Amsden 1989). The fact that the State develops its agenda independently does not mean that it undertakes activities that are necessarily opposed to the interest of the dominant classes, especially capital. In fact, one element of the State 1 8 1 agenda, in almost all late-developing societies, was to foster accumulation, which is the goal of capital. However, the fact accumulation is made subservient to some other, possibly broader objective of the State comprises the critical characteristic of the developmental State. These objectives are broader in the sense that they represent the interest of other groups in society, and the interest of the State itself. In the above, the use of the notion of autonomy attempted to confront one of the most problematic questions associated with the developmental state: i.e. must a developmental state be authoritarian? While the complexity of the question still remains outside this work, I attempted an answer by drawing upon two notions of autonomy. The first was the more traditional notion of structural autonomy, defined as the ability of the State to overcome constraints on its autonomy imposed by the structure. The second notion of autonomy that I developed was that of the developmental state as vested with embedded autonomy (Evans 1992). The idea of embedded state autonomy comprises a dialectic between "embeddedness" and "autonomy", and in that sense, requires no longer insulation as the only criteria of successful developmentalism. On the one hand, it implies the existence of intricate linkages between the State and the dominant groups; these linkages however, do not erode the State's ability to insulate its decisions from the demands of 1 8 2 these dominant classes, and pursue its own agenda. In that sense, a State's embedded autonomy is manifested in its ability to extract information and performance from the dominant classes simultaneously by virtue of its embeddedness in society and its insulation from private interests. The state however, is not insulated from the decision-making processes of the private groupB. In fact, the autonomy of the State derives pre cisely from its embeddedneso in these "private" decision-making processes, whereby no private actor, especially mportant actors like large conglomerates, can make a decision outside of the state's domain of knowledge. In sum then, embedded autonomy implies the ability of the State to systematically encroach upon the autonomy of capital, without allowing capital to similarly invade its own autonomy. As I pointed out in the work, this model of autonomy offers a very useful conceptual strategy in two ways. First, in agreement with the developmental state literature, it suggests, that it is not the disciplining of labor, but businesses, that might have been critical to the success of the East Asian model. In that sense, the repression of large social groups may not be a necessary condition for economic growth. Second, if the State is indeed capable of encroaching upon the decisions of large domestic capital as the model of embedded autonomy suggests, then, under a situation of democratic politics, the apparatus of the State can be brought 183 to influence these decision-making processes in order to fulfill social priorities. It seems permissible then to proceed with the working hypothesis that it is embedded autonomy that all interventionist states have aspired to, but only few have achieved. In my comparison of South Korea and India, I found myself being led to the hypothesis that embedded autonomy of the type described by Evans may become possible only under certain historical contingencies under which states are formed, and contingencies under which states enter into relationships with business. Looking at the history of the developmental states, one can suggest at least two such contingencies (a) states attempting land reforms through which the dominant land-owning classes are weakened and (b) a weak or non-existent bourgeoisie which is dependent on the State for its own development. As such the State does not need to enter into a collaboration with any of the dominant classes— one of which it destroys and the other it develops, albeit through extensive controls (Amsden 1989; Kim 1991; Chang 1993; Haggard 1990). By contrast, the Indian state, and I believe many other "non-developmental" States, are formed under very different circumstances. First, the nascent political elite was unable to undertake any change that may weaken the dominant feudal class. This is reflected in the consensus 184 within the different factiona of the State for significant land reforms but the inability to institute it. In addition, there existed a strong indigenous bourgeoisie which had developed through a contradictory relationship of conflict and collaboration with foreign capital. The consolidation of indigenous capital had thus preceded the consolidation of the State. Can one argue then that the initial presence of strong indigenous local capital pre-empts the possibility of the emergence of a developmental state? It is here that the Indian case represents an intriguing complexity: despite the initial dominance of the business class, the State was able to establish extensive mechanisms of control on business. These attempts at control are cast in the rhetoric of structural change that is much more anti thetical to the general interests of business than the typical developmental state. In fact, in complete contradiction to the developmental state, the Indian state at its formative moment drew its legitimacy from the objective of socialist transformation. The legitimacy of this project was drawn from the elements of popular mobilization unleashed by the anti-imperialist struggle. The state's attempts to control capital was a part of the national project where production was to be increasingly socialized. 185 However, as I tried tc demonstrate in the work, the state could hardly enforce these mechanisms. The limits on enforcement were imposed systematically by capital, as well as the other dominant groups, and most importantly by the State itself (Bardhan 1984). This represents the idea of the self constrained state that I introduced briefly. This brings us to the argument we stated at the beginning, that the success of intervention is determined by the relationship between State and capital. As I discussed in Chapter 1, at present there are two dominant types of theories in this regard. The first is a claBS of theories that assume a conflictual relationship, based on a liberal notion of enterprise. Centered around the idea of rent-seeking, this school is the primary advocate of "liberalization", as a way of freeing private enterprise from the predatory and rent-seeking State. "Liberalization" occurs as the State rolls back, so that its ability to extract rents from capital is severely curtailed. This in turn frees up social resources from "directly unproductive activities” (such as rent-seeking) and minimizes the factors which erode growth. In sum, these theories assume a relationship between state and capital, where the state imposes constraints on capital as the latter tries to further its goal of accumulation. The state is assumed to be an autonomous political actor, and can only be obstructive to accumulation. 186 In the light of our discussion above, state action (in non socialist societies) can not be wholly opposed to the goals of capital, as suggested by the liberalization model* States internalize, in varying degrees, the goal of capital. On the other end of the continuum is the genre of theories which proceed from a collaborative relationship between state and capital. The most orthodox version of this is the Marxist idea of instrumentalism where the State exists solely on behalf of, and in order to further the goals of private capital. The major critique of this model is that it provides no room for the autonomy of the state as a political actor; hence it contradicts the reality in post-Colonial Third World socioties like India, where the State appears to have acted autonomously in significant ways (Bardhan 1984). The most significant indicator of this in India is the relative unimportance of foreign capital in the economy. Dissenting with the above theories, I argued that the relationship between State and capital is neither purely collaborative nor purely conflictual. Essentially, how the state interacts with capital is circumscribed by the State's goal of obtaining legitimacy. In order to obtain legitimacy, the State needs to fulfill the twin goals of accumulation and legitimation. Under all non-socialist social formations, these goals are inherently contradictory, since they concern goals of social groups whose interests are in direct conflict with 187 each other. As such, the State must internalize this inherent contradiction between these conflicting interests for the sake of obtaining legitimacy as a class-neutral state. Intervention is one of the ways in which the State attempts to resolve this contradiction between legitimation and accumulation. First, States may use intervention minimally, to fulfill certain requirements of legitimation through redistribution. Taxation becomes the primary instrument in this case. Second, States may use intervention as a way to ensure economic growth, when it proceeds on the assumption that the usual capitalist institutions may not be able to bring about the desired nature of growth at the desired speed. The State supports accumulation by allowing private capital to deploy public resources, but in exchange extracts performance according to standards determined by the State. Third, States may use intervention to obtain legitimacy through factors in addition to economic growth. In this case, the very act of intervention— seen as a method of establishing public control on private accumulation— may itself be an important source of legitimation, and hence help gain legitimacy for the State. With the exception of the NICs, most Third World states like India have used intervention in more than one of these three ways. In each case, the underlying relationship between state and capital— both determines and is determined 1 8 8 by the use of intervention. This relationship is thus a dialectic between collaboration and conflict, dominated by the State at times and by capital at others. Collaboration occurs when both State and capital pursue the goal of accumulation; conflict occurs when the State pursues goals distinct from, or in opposition to, that of accumulation. To summarize then, we have used here a comparison between South Korea and India as the polar representatives of the success and failure of intervention to challenge some of basic presumptions of the neo-orthodox model: (1) state intervention is necessarily inimical to growth; (2) administering intervention is a function of bureaucratic efficiency, and since bureaucracies are by nature inefficient, (3) State intervention can only generate inefficiencies. He suggested that these presuppositions emerged out of essentially euro-centric models uninformed by the complexity of the "state" in late developing societies. Since it derives from such euro-centric paradigms, the liberalization model may unleash its own ambiguities when imposed on these late developing societies which, over the last several decades have come to be characterized by their own peculiar histories of intervention. In India, we are already witnessing an ambiguity in the response of the private sector that we alluded to at the very beginning. 189 The most disturbing possibility that economic liberalization opens up in a historical context of unidirectional intervention, is that of contingent liberalization, by which X mean an optimal mix of policies from the interventionist regime and from a liberalized regime (optimal from the perspective of a dominanr group;. This mix would be "optimal" from the perspective of the dominant social groups like business, the upper class of consumers, the highly skilled faction of the labor force, and the technocratic, Westernized core of the bureaucracy, etc. While it is generally assumed this the balance of gains over losses, particularly from the perspective of business, will be positive in the post-liberalization order, this is not necessarily the case. Only in countries where corporate autonomy was most strictly limited, or even suspended by the interventionist state, would firms would expect a net gain from liberalization. However, a strict limitation of corporate autonomy, or its total suspension, was not the case in all interventionist economies. India is a perfect counter-example of an interventionist regime where substantial gains from intervention were realized by the business without suffering serious restrictions on corporate autonomy. Once this is acknowledged, it is not difficult to postulate a regime of contingent liberalization where the 190 prospects of monopolistic accumulation are furthered. This will not necessarily be conducive to a rent-eroding set of institutions. Rather, the contingencies which liberalization would have to confront may even increase the total volume of rent produced in society. The rhetoric of liberalization, however, will help in systematically reducing the State's claim to that rent vis-A-vis the corporate sector, by reducing the State's redistributive responsibilities. IMPLICATIONS There are some further implications of the arguments developed above. The first concerns the distinction between accumulation and growth and the assertion that accumulation may not necessarily be conducive to growth. The liberalization model proceeds from an assumed equivalence of accumulation and growth, and hence sees private enterprise operating under a laissez-faire state as the necessary and sufficient condition for growth. While free enterprise may have fulfilled its role during the First Industrial Revolution, for late developing countries state intervention, characterized by reciprocity, may have been a critical factor. In late developing countries, intervention has proved critical in at least three ways. First, intervention has been central to resolving the conflict between short-term profits and long run growth. Second, it was necessary to ensure that 191 the social surplus generated in the process of accumulation was consistently saved and invested at some pre-designated rate. This was the distinguishing characteristic of capitalism in its most productive initial years. Third, intervention may have been critical in ensuring that increases in profits were solely (or primarily) due to productivity gains rather than market distortions. The question that has become inextricably linked with these issues, is whether a developmental state must also necessarily be an authoritarian state. The empirical evidence has certainly been interpreted as such, and has in fact strengthened the view in favor of a retreat of the state. Such a retreat, it is held, not only frees up private enterprise, also opens up possibilities of increasing democratization. While no definitive answers to such questions can be offered, it may be useful to close with a few comments. First, the assumed compatibility of free private enterprise and democracy is a tenuous one and it comprises one of the oldest unresolved debates in political economy. Second, it is crucial to note that while all developmental States have been authoritarian, all authoritarian States have not been developmental States. A difference between the two may be conceived of as follows. A developmental State is characterized primarily by its disciplinary power over economic actors, especially business. Authoritarian states on the other hand, seek to discipline individuals in their capacity as 192 social and political actors; this explains why in most authoritarian states inefficient economic management went unpunished while the cost of political dissent was made insurmountable. Let us conclude by noting that perhaps the central element of the developmental state has been the ability of the State to discipline itself, i.e., to prevent its own enrichment from derailing its development efforts. 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Creator Mukherjee, Ananya (author)

Core Title The Interventionist State Revisited: The Political Economy Of State-Business Relations In India

Degree Doctor of Philosophy

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