POLITICAL SCIENCE I

CONCEPT OF POLITICAL ECONOMY: IMPACT OF

ECONOMIC FACTORS ON POLITICAL LIFE

Submitted By:

Abhinav Sekhri

ID No: 1701

I Year, B.A. LL.B. (Hons.)

Date of Submission: 17th December, 2009

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

BANGALORE

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TABLE OF CONTENTS

INTRODUCTION.................................................................3
RESEARCH METHODOLOGY..............................................4
WHAT IS POLITICAL ECONOMY?......................................6
INDIAN POLICIES AND THE NEED FOR REFORM..............10
THE ECONOMIC REFORMS, 1991: A CASE STUDY..........11
POLITICS OF ECONOMIC REFORMS..........................................13
INTERNATIONAL DIMENSION..................................................16
IMPACT OF ECONOMIC FACTORS ON POLITICS...........................18
CONCLUSION..................................................................21
BIBLIOGRAPHY...............................................................22

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INTRODUCTION

The concept of political economy has been present since the 17th century, but the discipline as
we understand it today only came about by the efforts of classical British economists such as
Smith and Malthus, who explained political economy to be the study of how nations function
to gain wealth through political processes. From then the discipline has developed
significantly, and the acceptance of a mutual relationship was widely acknowledged.

Political economy is at the heart of political science today as economics has gained immense
weight in political discussions and negotiations. It is also evident from the development of
political theory. The classical and neo-classical theories only deviate on the grounds of the
latter interpreting those involved in the political process are entrepreneurs and consumers,
showing the impact of economics on politics.

The researcher shall through this paper attempt to explain what political economy is, and
trace the development of this discipline/concept through time to that it is today. To elaborate
on how political economy functions in the world, the researcher shall use the example of the
economic policy reforms that happened in India in 1991. The reforms were highly political in
nature, as one government had tried to implement them and failed while the other succeeded.
Their effect was felt on every sphere of life, although some measures had immediate impact
while others did not, and since then the political attitudes have been altered significantly. The
example should prove fertile ground for study, and the researcher hopes that the paper can
deal with all areas touched upon diligently.

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RESEARCH METHODOLOGY

I. AIMS AND OBJECTIVES

This paper aims to understand the concept of political economy and how it has
developed. The researcher shall also through a case study show political economy in
action and the effects of the constituent disciplines on each other.

II. SCOPE AND LIMITATIONS

The scope of this paper has been limited to mainly secondary sources of data because
of the time constraints. A case study has been used to explain the working of the
concept of political economy.

III. RESEARCH QUESTIONS

The researcher seeks to answer the following questions through this paper:
i. What is the concept of political economy?
ii. What has been the development of this concept?
iii. What are the effects that political factors have on economics in a nation?
iv. What are the effects of economic factors on politics in a nation?
v. How do international political economy structures function?

IV. CHAPTERISATION
The paper has been divided into the following chapters:

Chapter I: What is Political Economy?

This chapter undertakes the task of explaining what political economy is, how do
economics and politics interact to give rise to this discipline, and what has been its
development over the years.

Chapter II: Indian Policies and the Need for Reform

This chapter introduces the case of India’s economic reforms chosen by the researcher
by laying an overview of the Indian political economy prior to reforms, explaining
how the policies failed giving rise to the need for reform

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 Chapter III: The Economic Reforms, 1991: A Case Study
This chapter contains three sub-chapters aimed to deal comprehensively with the case
chosen; they are;
i. The politics of economic reforms; understanding the impact of politics on
reform
ii. A comment on the international nature of reforms
iii. The impact of economic reform on politics: how economic factors impact
politics?

V. STYLE OF WRITING
The style of writing is descriptive and analytical, with a case study to explain theory.

VI. STYLE OF FOOTNOTING

The style of footnoting is uniform throughout the paper.

VII. SOURCES
In this paper, primary and secondary sources of data have been used.

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WHAT IS POLITICAL ECONOMY?

The phrase political economy first appeared in 1625, when a French economist Montchretien
used it to explain his work. The term gained currency in Britain in the 18th century, when Sir
John Stewart Mill used it for the title of his book, An Inquiry into the Principles of Political
Economy in 1761.1 The discipline of political economy has moved leaps and bounds since,
along with what it means. The classical economists of Britain-Smith, Ricardo, and Malthus-
had similar conceptions of what political economy means, a view highly disposed towards an
economic-centred understanding. In fact, most scholars used political economy to signify the
economy itself, as it was generally accepted that politics is inseparable from economics. 2
After all, no economic policy of a country remains without political implications, thus
making it shaky on economic grounds.3

With the passage of time it was realized that the relationship between the two disciplines is a
symbiotic one. While politics was recognized to have an unyielding influence on the
economic domain, the economic modes of reasoning and thought found its way into the
political sphere. Economics is nothing but the problem optimal choices in face of constraints.
An application of this science on to politics revealed new and interesting fronts of behaviour
analysis of those involved, as well as decisions they made. 4 It has contributed significantly to
the processes of data collection, aggregation, and analysis,5 making the entire process much
more scientific and objective, to put forth clear theories explaining trends in the political
domain of life.

This is just one lens to look through for the impact of economics on politics; the other is to
see the impact of economic effects. Political economy after all is the study of the interactions
between economics and politics,6 and a review of the period post the Second World War goes
a long way to show the impact of economic factors on politics, both domestically and at an
international stage. When India attained independence, the political mindset of the nation’s

1
Drazen, Political Economy in Macroeconomics, 1 (New Delhi: Orient Longman Pvt. Ltd, 2004).
2
Id.
3
Lohmann, “The Non-Politics of Monetary Policy” in Oxford Handbook of Political Economy, 523 (ed.
Weingast & Wittman. New York; Oxford University Press, 2006).
4
Miller, “The Impact of Economics on Contemporary Political Science,” 35(3), Journal of Economic Literature,
1173 (1997).
5
Ibid at 1174.
6
Supra note 1, at 3.

6
leaders was largely determined by the nation’s economic health, and the trend continues
today, where a successful budget can go a long way in attaining political success. The Bretton
Woods Twins came up post World War II, and nations started to enter into economic
partnerships rather than plunder each other. The IMF and World Bank (hereafter ‘the Bank’)
engaged in speeding up the development of the world, and as a rider on their loans countries
had to adopt policies contrary to their political ideals. The favoured mode for reprimanding a
nation for breaching codes of peace was no longer invasion with arsenals, rather, just cutting
the nation off by imposing economic sanctions. As Kirshner succinctly puts it, money is
politics today.7

Before explaining further what is political economy, the researcher would like to explain its
basic constituents in their individual nature, as one of the problems felt by scholars is the
tendency to ‘gloss over’ their distinctiveness. These are by no means complete definitions as
both political science and economics are huge disciplines, but this explanation is given to
further how they come together to create political economy.

As Morgenthau put it, politics is the struggle for power. 8 It has always meant who gets what,
when and how,9 something based on the allocation of power in society. Some say politics is
conflict; us against them.10 These and many more have contributed to the understanding of
what is political today, but the researcher would highlight three approaches which have the
most potential to be associated with economics. These are: politics as government, public life,
and as the authoritative allocation of values.11 Very briefly, the notion of government as
politics need not be explained much, it is by default integrated with economics with
budgetary constraints demanding optimal allocation of limited resources. Public life requires
more understanding, as there can be two notions of public itself. The first, contributed by
Dewey, basically purports all acts between individuals that affect others constitute what is
public.12 The second given by Arendt categorises the public as that which informs, animates
and gives life to the private realm.13 Finally the notion of politics being the authoritative

7
Kirshner, “Money is Politics” in Review of International Political Economy, 10(4), 645 (2003).
8
Morgenthau, Politics among Nations: The Struggle for Power and Peace, 195 (New York; Knopf Publications,
1948).
9
Lasswell, Politics Who Gets What, When and How (Cleveland: World Publishing Co, 1958). As cited in
Levine, Capraso, Theories of Political Economy, 8 (Cambridge; Cambridge University Press, 1992).
10
Schmitt, The Concept of the Political, New Jersey; Rutgers University Press, 1976). As cited in Levine,
Capraso, Theories of Political Economy, 8 (Cambridge; Cambridge University Press, 1992).
11
Levine, Capraso, Theories of Political Economy, 8 (Cambridge; Cambridge University Press, 1992).
12
Ibid at 13.
13
Id.

7
allocation of values is very similar to economics, as both talk about economising in given
resources, however the basic difference is that in economics decisions are voluntary, whereas
politics has the presence of authority.14

The Greeks understood economics as the study of management of individual households,15

today it is accepted to be the study of choices individuals make in face of limited resources.
However, the term ‘economic’ itself conveys many things, where again the researcher shall
only entertain those few meanings which are most conducive to its synthesis with politics for
the discipline of political economy. Very briefly put, ‘economic’ can refer to doing things
‘economically’, i.e. doing things in an efficient manner which consumes least effort. Even in
politics, one can use ‘economic’ calculations to determine the efficiency of those involved in
the decision making process, and analyse the efficiency of their decisions.16 The second
theory is that ‘economic’ refers to productive activity; making things we want. 17 These things
need to be provisioned among the people and in a manner which ensures welfare; inviting
political intervention. Thirdly, ‘economic’ also tends to relate to market institutions, to what
we call the ‘economy’.18 Economists go great lengths to argue that the most economical
method of satisfying individual wants would be through free-market policies. But this laissez-
faire approach is something rarely followed by the State; in reality political or as we said
governmental intervention in the market mechanism occurs to ensure the system does not go
against the people’s welfare.19

So what is political economy? Adam Smith’s understanding broadly represents the

understanding of classical economists of political economy. For him, political economy was
the science of managing a nation’s resources to generate wealth.20 He considered it as a
means to enrich both the people and the sovereign, and believed two systems existed to
achieve the same, namely commerce and agriculture. 21 Other literature such as Jevons’
Theory of Political Economy shows that the basic understanding of the classical was of
political economy being a study of wealth and value. 22 Karl Marx believed it to be the study

14
Supra note 11, at 16.
15
.Douglas Harper Online etymology dictionary: Economics. Source: http://www.etymonline.com/index.php?
term=economy (14 December, 2009).
16
Supra note 11, at 21.
17
Id.
18
Supra note 16.
19
Id.
20
Smith, Wealth of nations, 161(ed. Mazlish. New York: Dover Publications, 1961).
21
Id.
22
Jevons, Theory of Political Economy, i (London: Macmillan & Co, 1871).

8
of how the ownership of the means of production influenced historical processes, 23 attuned to
his understanding that historical processes were the driving force behind the present
condition. To give a basic definition, Political economy refers to the distribution of political
and economic power in a given society and how that influences the directions of development
and policies that bear on them.24

The scope of this distribution of power can be domestic or international. International

political economy teaches one how to think about the connections between economics and
politics beyond a nation’s territorial boundaries. 25 Most of the world’s energy is sourced from
a handful of countries;26 can anyone doubt that politics plays a crucial role in the distribution
and availability of this energy? Most of the national currency circulates outside the nation; we
have a Korean company Hyundai as fastest growing car manufacturer in India;27 Most I-T
firms in Bangalore are foreign firms; most of the clothes on people are Chinese-make; can
one honestly believe that none of these market transactions do not have any political
ramifications whatsoever? Certainly not, and this is what one can find in the domain of
international political economy.28

The researcher has explained broadly what entails when one speaks of the concept of political
economy. Again, it is the result of the interaction between the economic and political spheres,
and is present everywhere, in any political, economical or international policy that the nation
might adopt. To study deeper the synergy between politics and economics, the researcher has
chosen to examine the phenomenon of liberalisation and policy changes in India brought
about in the mid 1980’s, crystallised by the New Economic Policy adopted in 1991.

23
Weingast & Wittman, “The Reach of Political Economy” in Oxford Handbook of Political Economy, 4 (New
York: Oxford University Press, 2006).
24
Bardhan, “Political Economy,” 1. Source:
http://emlab.berkeley.edu/users/webfac/bardhan/papers/BardhanPoliticalEconomy.pdf (14 December, 2009)
25
Cohen, International Political Economy: an Intellectual History, 1 (New Jersey: Princeton university press,
2008).
26
Based on 2008 estimates, Saudi Arabia, Russia and the U.S.A together produce almost 29,00,000 bbl/day of
oil, greater than the cumulative output of the next 8 nations on the list. Source:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2173rank.html (14 December, 2009).
27
Source: http://hyundai.co.in/aboutusn.asp?pageName=comp (14 December, 2009).
28
Supra note 25, at 2.

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INDIAN POLICIES AND THE NEED FOR REFORM

India’s economic policy has always been integrated with its political ideals of socialism as
embodied in the Constitution and affirmed by the 42 nd Amendment in 1976.29 The Directive
Principles of State Policy (DPSP) contain provisions such as the State shall strive to ensure
that there is no concentration of wealth and there is equal distribution of resources in the
economic system.30 In accordance with these ideals, India followed a planned approach to
development through the Five Year Plans started in 1951, and today the 11th Plan is running.31

The path of economic development adopted by India from independence till reforms was
protectionist, with numerous (seemingly) draconian legislations like the Monopolies
Restrictive Trade Practices Act, 1969 (MRTPA), Foreign Exchange Regulation Act, 1973
(FERA) present to further the constitutional directions for an ideal State.32 State politics were
deeply intertwined with economic agendas, numerous ‘Public Sector Enterprises’ (PSU)
being visible examples. There were PSU’s for everything, from making soap and bread, to
operating airlines and hotels; a policy which raised many eyebrows as in no manner could
hotels be considered a public use as more than half of the country could not afford them! 33
Corruption and inefficiency were rampant; inflation kept rising along with absolute poverty
and debt. To finance the expenditures which exceeded the State’s coffers, India took foreign
debt and monetised its deficit, healthy if done for a short period, but in India’s case, it led to a
looming financial crisis by the late 1980’s in spite of half-hearted reforms initiated by the
Rajiv Gandhi.34 This culminated in the adoption of the New Economic Policy (NEP) in
1991.35

29
The word ‘Socialist’ was added to the Preamble of the Constitution of India by the 42nd Amendment, it now
reads, SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC. The Constitution of India, 2008.
30
Article 39 (b) and (c) contain the said provisions; The Constitution of India, 2008.
31
The 11th Five Year Plan shall operate from 2007-12, The Planning Commission of India. Source:
http://planningcommission.gov.in (13 December, 2009)
32
Goyal, “Political Economy of India’s Economic Reforms,” 16 (New Delhi: Institute for Studies in Industrial
Development, 1996). This is a paper presented at the Centre for Development and the Environment, Oslo.
33
Bhagwati, “What Went Wrong” in Critical Issues in Indian Politics, 44 (ed. Mukherji. New Delhi: Oxford
University Press, 2007).
34
Mukherji, “Introduction: The State and Private Initiative in India” in Critical Issues in Indian Politics, 12 (ed.
Mukherji. New Delhi: Oxford University Press, 2007).
35
Supra note 33, at 48.

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THE ECONOMIC REFORMS, 1991: A CASE STUDY

India’s economic crisis according to many economists was highly speculative in nature; it
was triggered by a hike in the inflation rate coupled with a worsening trade balance due to the
oil price hike following the Gulf War.36 The nation did have a deficit around US$ 9,438
million, but still could sustain three months import cover generally considered safe; thus it
was the speculative outflow of funds which was the culprit.37 However, this by no means
removes the blame from policy programmes adopted by the State. As already stated, the
DPSP’s demand a socialist mentality from the State, thus at independence what emerged was
an economic policy characterised by excessive bureaucratic control over all sectors, an
inward-looking trade and foreign investment policy, and a huge public sector, which went
well beyond regular conceptions of public utility and infrastructure.38

Thus productivity suffered, exports were neglected and private sector growth stifled. Even
though the private sector did gain strength by the 1970’s, State policies and poor performance
of PSU’s in providing necessary facilities hampered their growth. 39 The PSU’s were failing
miserably (barring a few exceptions in the oil and gas sector) and there was widespread
corruption and misappropriation of assets.40 Excessive protectionism through draconian
legislations and policies such as License Raj eliminated product diversification, expansion,
and were coupled with a series of unsound, arbitrary decisions multiplying the problems in
the economy.41 The Nehruvian models had long outlived their day; now the country was
facing the music. In light of the all these issues, the country approached the IMF for a
Structural Adjustment Loan (SAL) for US$ 5 million along with aid around US$ 2.3 billion.

Following a few years’ stability period, the country set about implementing the policy
reforms outlined in the SAL, briefly put;42

i) Deregulation of domestic industry and promotion of foreign direct investment;

ii) Liberalization of the trade regime;
36
Patnaik & Chandrashekhar, “The Indian Economy Under ‘Structural Adjustment’” in Critical Issues in Indian
Politics, 53 (ed. Mukherji. New Delhi: Oxford University Press, 2007).
37
Supra note 37, at 55.
38
Supra note 33, at 32
39
Id.
40
Nayyar, “The Public Sector in India” (table 4). As cited in note 33.
41
Supra note 33, at 35.
42
Topalova, “Trade Liberalization and Firm Productivity: The Case of India” IMF Working Paper WP/04/28, 4
(2004).

11
 iii) Reform of domestic interest rates coupled with measures to strengthen capital
markets and institutions;
iv) Initiation of public enterprise reform.

The main reasons for the researcher taking up this case are that the reforms were the most
influential economic development post independence in India, and have significantly affected
the nation’s political economy. Also, the involvement of external bodies such as the IMF and
World Bank brought in the element of international political economy, making the case quite
comprehensive for the purposes of this paper.

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POLITICS OF ECONOMIC REFORMS

India followed an import-substitution-industrialisation (ISI) model of modernisation for about

40 years from independence, and even though the policies were flawed, there was progress.
As Huntington says, “Social and economic change, urbanisation, increases in literacy and
education, industrialisation, mass media expansion – extend political consciousness, multiply
political demands, broaden political participation.”43 This is what was experienced; with
growth of towns, migration of people from villages to cities, spread of the television and
development of the press and betterment of educational facilities in the country, there was a
direct impact on the political sphere of individuals’ lives. 44 There was greater voter turnout
with each successive poll, and the party structure started to move from one-party dominance
to bipolarity and emergence of many state-specific parties. 45 But increased participation was
not restricted to voter turnouts; more people openly showed their agitation towards the
government and its policies, notably the failed economic ideals prolonging severely low
productivity and a virtually non-existent export sector.46 India was at almost the same level of
productivity relative to the U.S.A in 1963, but in 1993 India lagged far behind the two who
had adopted alternate policies of trade led growth (TLG).47 The dissatisfaction with the
present policy paradigms was evident and all this augmented the need for reform. But all is
not so simple, India had been on this track for the past 40 years, and paradigm shifts in policy
do not happen overnight. This is what was misunderstood by the Rajiv Gandhi government
and thus its efforts only led to initiating partial reform; a deeper look shall be insightful.

RAJIV GANDHI AND THE POLICY DEBACLE

Rajiv Gandhi led the Congress party to its biggest post independence election win, where no
opposition party could garner more than 30 seats alone. 48 The unrivalled power gave a sense

43
Huntington, Political Order in Changing Societies, 5 (Connecticut: Yale University Press, 1968).
44
Mukherji, “Economic Transition in a Plural Polity” in Critical Issues in Indian Politics, 121 (ed. Mukherji.
New Delhi: Oxford University Press, 2007).Voter turnout increased rapidly from 48% in 1957 to 58% in 1962,
but has stabilised since in the range of 62% or around.
45
Sridharan, “The Fragmentation of the Indian Party System, 1952-1999: Seven Competing Explanations,” in
Parties and Politics in India, 481 (ed. Hasan. New Delhi: Oxford University Press, 2002). As cited in note 44.
46
India’s share in manufacturing exports of the world in 1990 was estimated to be .54%, see Kathuria,
“Competitiveness in Indian Industry” in Indian Industry, 154 (ed. Mokherjee. New Delhi: Oxford University
Press, 1995).
47
Timmer & Szirmai, “Comparitive Productivity Perfromance in Manufacturing in South and East Asia,” 27(1)
Oxford Development Studies, 61, 66(1999). As cited in note 44, at 123.
48
Source: http://www.indiaelections.co.in/prime-minister/rajiv-gandhi/ (13 December, 2009).

13
of authority, and with the helm being led by leaders from corporate backgrounds (Rajiv
Gandhi himself was a commercial airplane pilot prior to politics), the government decided to
answer the call for reform. Trumpets heralded the coming of change, and the charismatic
Prime Minister could be seen/heard everywhere promoting reform.49 Budget proposals for
1985-86 affected mass politics by measures such as de-licensing, subsidy cuts, and taxation
reforms and received brickbats and bouquets from market-oriented economists.50 However,
there was a political revolt, and the government got caught up in fending off flak coming
from all quarters such as allegations of being an ‘anti-poor’ government. The reforms were
by no means successful, and many of the reforms planned were rescinded or reduced in
intensity; by 1988 it was accepted that changes must be gradual; contrary to the vigour a few
years ago of Prime Minister Gandhi who was willing to confront “vested interests in almost
every field...”51 for reform.

THE SUCCESS OF THE RAO GOVERNMENT

Compare this to the political situation in 1991 and the impact of politics on economic reforms
becomes plain to see. The Rao government did not even have majority support when it came
to power in July 1991, and the Prime Minister fell far short of Rajiv Gandhi’s charisma. Yet
where the erstwhile government only managed to de-license a few industries, the Rao regime
managed to de-license all but few. So how did a relatively infirmed regime manage such a
monumental task? No doubt the crisis acted as a panic button, however as shown it was
smaller in magnitude than earlier oil-price shocks. Rather its perception by the political
structure was of utmost importance. But how did this minority government manage to pass
three budgets with the bulk of India’s reforms?

The key to this success lies in the Hindu-Muslim violence stealing the spotlight, and the
reforms escaping popular discussion in the country. The first debates on the budgets brought
much criticism to reforms, branding them as “anti-poor, anti-farmer, anti-development, and
pro-inflation.”52 Still, politicians did not vote against it, as there was the more pressing
concern of Hindu-Muslim violence in the wake of the Babri Masjid demolition led by the
second largest party, the BJP. Mobilisation as discussed before had changed the political
49
News Piece, 6 January, 1985, Times of India. As cited in Varshney, “Mass Politics or Elite Politics?
Understanding the Politics of India’s Economic Reforms” in Critical Issues in Indian Politics, 152 (ed.
Mukherji. New Delhi: Oxford University Press, 2007).
50
Varshney, “Mass Politics or Elite Politics? Understanding the Politics of India’s Economic Reforms” in
Critical Issues in Indian Politics, 153 (ed. Mukherji. New Delhi: Oxford University Press, 2007).
51
Interview in the Telegraph, 12 March, 1986. As cited in note 50, at 154.
52
This criticism was raised by H.D. Deve Gowda of the Janata Party. Lok Sabha Debates, 296, 31 July 1991.

14
structure, and it was now triangular. So while the left disliked the reforms, they disliked
Hindu nationalism much more and considered it a significant threat. All BJP members
opposed the budget the first time, 53 but it was not enough. Even popular discontent was not
major, as everyone was concerned about the growing inter-religious tension. The reforms
marched on because the Hindu nationalist movement had stolen the show and became the
focal point of political associations or animosity. The 1985 reign had no such pressing issue,
and the spotlight became the reason for failure.

Elitist politics are those which are usually found in debate sessions in parliaments and within
the bureaucracy; not part of street talk on politics.54 Most of the reforms like tax concerns,
exchange rates, tariffs, and stock market reform were elitist in nature and remained distant
from mass politics, thus were successful. However, some economic reforms do conjoin with
mass politics because of the massive numbers they affect directly, and faced many obstacles,
labour laws being the best example. 55 Statistics reveal that only 19% of the electorate was
aware of trade reforms (14% of the rural electorate), whereas almost 75% of voters were
cognizant of the Babri Masjid demolition;56 revealing the elitist nature of major reforms. The
leaders this time around used this information strategically and did not package with those
directly affecting most people; they cloaked mass-political change in the garb of continuity. 57
This went a long way on sustaining the reform process, and gradually moving to more
directly affecting reforms once the base was laid.

Thus one can see how the “political logic influenced by communal passions”58 actually
enabled those at the helm to push for reforms. Differences in the two attempts at reform were
mainly in the political setting, with differences also arising in the manner of execution, with
the earlier attempt focusing on those which directly affected people. These differences in the
political realm are what proved crucial and resulted in minority government managing to
succeed in achieving an economic turnaround.

53
99 BJP were present at voting and all voted against. Lok Sabha Debates, 5 May 1993. However, only the
Communist Party of India (Marxist) consistently voted against the reforms
54
Supra note 50, at 147.
55
Ibid at 158.
56
Yadav & Singh, “Maturing of a Democracy” India Today (31 August, 1996). The figures are from a CSDS
survey contained in the article.
57
Jenkins, “Political Skills: Introducing Reforms by Stealth” in Critical Issues in Indian Politics, 173 (ed.
Mukherji. New Delhi: Oxford University Press, 2007). Also see Nandy, At the Edge of Psychology: Essays in
Politics and Culture, 51 (New Delhi: Oxford University Press, 1990).
58
Supra note 50, at 149.

15
INTERNATIONAL DIMENSION

Robert Putnam envisages two scenarios emerging in international relations economic

bargains; one where national authorities bind themselves through political constraints to gain
stronger bargaining positions in negotiations, second being where they enter into international
agreements to accomplish domestic objectives difficult to realise on their own.59 Vreeland
furthers on this argument making it specific to loan-taking from the IMF, showing through
empirical analysis that countries not only take loans because of financial instability, but to
enforce unpopular political reforms and cannot be done without a certain ‘push’.60

India always had a long relationship with organisations like the World Bank and IMF; it has
been one of the Bank’s largest borrowers and was called the ‘Jewel in the Crown’ of the
Bank.61 However, in spite of such borrowing, the country has relatively less dependence on
aid than other similar nations and the Bank has experienced limited success in influencing
Indian politics. Ever since 1966, when Indira Gandhi had to devalue the rupee to get aid and
face huge criticism for such ‘bowing down’, she amassed a foreign exchange cushion to
never be so ‘vulnerably dependent’ on foreign aid.62 Subsequent bitterness followed in India’s
relations with the Bank, and the Bank’s policies were much different from those followed
with other nations during the 1980’s.63

The crisis in 1990-1 again rendered India in dire need for aid; however this time the situation
was different and was viewed differently. The leadership was more united for reform,
branding them necessary to assert India’s power globally; and used this crisis as an
opportunity to advance reforms. Further, the fall of the USSR and rise of China sent a signal

59
Putnam, “Diplomacy and Domestic Politics: The Logic of Two-level Games,” International Organisation, 42
(1988).
60
Vreeland, “Why do Governments and IMF Enter into Agreements? Statistically Selected Cases,” 24(3),
International Political Science Review, 321 (2003).
61
Caufield, Masters of Illusion: The World Bank and the Poverty of Nations, 23 (New York: Holt & Co, 1996).
As cited in Kirk, “Economic Reform, Federal Politics, and External Assistance: Understanding New Delhi’s
Perspective on the World Bank’s State-Level Loans” in Critical Issues in Indian Politics, 272 (ed. Mukherji.
New Delhi: Oxford University Press, 2007).
62
Lewis, India’s Political Economy: Governance and Reform, 139 (New Delhi: Oxford University Press, 1995).
As cited in Kirk, “Economic Reform, Federal Politics, and External Assistance: Understanding New Delhi’s
Perspective on the World Bank’s State-Level Loans” in Critical Issues in Indian Politics, 272 (ed. Mukherji.
New Delhi: Oxford University Press, 2007).
63
Kirk, “Economic Reform, Federal Politics, and External Assistance: Understanding New Delhi’s Perspective
on the World Bank’s State-Level Loans” in Critical Issues in Indian Politics, 272 (ed. Mukherji. New Delhi:
Oxford University Press, 2007).

16
to many about the failure of socialism as policy.64 This furthered the idea reform, and the
nation accepted the Bank and IMF’s demands and proceeded on structural adjustment.

The IMF and the Bank have been branded as the harbingers of American policy, as the U.S.A
controls the most power in the politics of the Bank with 16.36% votes therefore it can veto
any change.65 What has followed as a result is growing popularisation of capitalism and TLG
programmes, popularly coined the ‘Washington Consensus’ in light of the Bretton Woods
Twins and the White House being located there.66 Propagation has been achieved by means of
imposing such conditions of ‘opening-up’ on nations who take the crisis packages from the
IMF required to stabilise their economy.

The Bank saw the loans as an opportunity to shape economic policy in India to conform to
what they thought was right. However the interaction between the Bank and the reforms was
limited, and by 1993 there was growing discontent that India was an opportunity foregone. 67
What followed was increased participation of the Bank; there was a new country director
appointed who brought with him new plans like sub-national plans to bind India further with
the Bank and give it greater policy influence throughout India. 68 The centre acquiesced to
these plans as state level growth was the next step in order to materialise the liberalisation
policies, and the state’s today enjoy greater freedom which shall be touched on later as well.
However it is misleading to say that the centre has moved out of the picture; it has moved
into a regulatory role and is just encouraging the impression that the Bank and states are
independent in this agreement for their success, but still remains the final authority on all
matters of external lending to states.

64
Ibid at 273.
65
This data is as of 30 September, 2009. Source:
http://siteresources.worldbank.org/BODINT/Resources/278027-1215524804501/IBRDCountryVotingTable.pdf
(14 December, 2009)
66
Williamson, “The Washington Consensus as Policy Prescription for Development.” Part of a lecture series
delivered at the World Bank (2004).
67
Supra note 63 at 273. This is part of the author’s interview with N. Roberto Zagha.
68
Edwin Lim was appointed as the new Country Director for India. Supra note 63, this was during the author’s
interview with him in 2003.

17
IMPACT OF ECONOMIC FACTORS ON POLITICS

The economic reforms initiated in 1991 had a deep nexus with the prevailing political
conditions in the country, and to a large extent were possible only because of them. However,
once they were underway, they had a significant impact on every sphere of life, and their
impact on the political is the focus of this section. The researcher shall study three major
effects of the reforms on the political realm; the nature in which they affected existing
political institutions, their impact on the political culture and finally their impact on political
mobilisation,69 which has been commented on earlier as well.

By political institutions the researcher wishes to refer to the ‘rules of the game’ as one says,
that governs the economic policy-making system. Whenever there have been reforms, they
have been accompanied by changes in the legal, social, political rules that govern the process
of production.70 One such change felt was the shifting nature of centre-state relations with
respect to economic and political federalism. More and more parties are cropping up on the
state level. States have become the primary area for investment and are attracting World
Bank structural adjustment loans for themselves, led by Chandrababu Naidu’s Andhra. 71 This
has mainly occurred from dismantling of controls and decline in public investment, thus
leading to a fall in the Centre’s leverage. 72 A direct result has also been the coalition
governments being formed at the centre, highlighting the increase in power the states wield as
a result of the advent of the federal market where they have asserted their importance. 73 There
has been an increased competition among states as each wants to attract private investment,
however at the same time competition can and does have ill effects, an example being an
inter-state tax war that arose to give concessions to investors by every state, which reduced
every state’s revenues consequently.74 Thus today in light of this increased sovereignty, states
are challenged to be more self-reliant and economical, as most are heavily indebted.75

69
Sarangi, “Economic Reforms and Changes in the Party System,” in The Politics of Economic Reforms in
India, 76 (ed. Mooij. New Delhi: Sage Publications, 2005).
70
Id.
71
Rudolph & Rudolph, “Iconization of Chandrababu: Sharing Sovereignty in India’s Federal Market Economy”
in Critical Issues in Indian Politics, 233 (ed. Mukherji. New Delhi: Oxford University Press, 2007).
72
Ibid at 235.
73
Supra note 63, at 266.
74
Jenkins, Democratic Politics and Economic Reform in India, 132 (Cambridge: Cambridge University Press,
1999).
75
Supra note 71, at 250.

18
The effect of economic factors on political attitudes is quite noteworthy. The changes such as
moving towards an open system, reducing central control and public investment also show
themselves in the political domain. Increased competition and reducing the State’s controls
has promoted greater efficiency among bureaucrats, and as every state is competing for
investment it fosters better practices.76 The spread of mass media has gone a long way in
formulating public opinion on many political matters, however, being profit making entities,
newspapers and media channels tend to emphasize more on sensationalist items, and things
such as economic reforms are put on the backburner. 77 Being more informed as a result of
spread of mass media also empowers the electorate in making informed decisions about the
choice they make, and also gain insight on the choices made by their representatives.

Here, the researcher would take a moment to discuss in greater depth the impact of
globalisation and economic trade liberalisation on politics in India. Globalisation can and
does go hand in hand in intensifying a cultural identity. When globalisation imposes
homogeneity in the form of the same McDonald’s, the same Toyota’s, people want to hold on
to what makes them different. As Thomas Friedman nicely puts it, “people have to choose
between the Lexus and the Olive tree,”78 not exactly choose, rather strike a balance. Finding
this balance has sparked a quest of identity forging in India today, 79 which has led to ugly
episodes like riots in Gujarat against Muslim communities. Ethnic identities are strengthened
today in light of the opening up, as there is felt a need to ‘protect’ national identity. 80 They
always manage to find a way into mass politics, as they can isolate a group based on
ascriptive basis.81 In light of this ethnic promotion, there has been further reduction in the
centre’s role as increasingly communities and organisations of these people feel they are
more competent to handle the situation.82 It has also furthered the ideological depravity in the
political parties of the country, as no one can stick to one agenda anymore.83

76
Supra note 69, also see note 71.
77
Supra note 56. As the statistics on knowledge of the reforms has shown; further, the CSDS survey revealed
that only 7% of the poor were aware of policy change, whereas almost 80% of the electorate was opinionated on
whether there should be a Uniform Civil Code, or religiously separate laws, and almost 87% had picked sides on
caste based actions.
78
Friedman, The Lexus and the Olive Tree, 249 (New York: Farrar, Strauss and Giroux, 1999).
79
Scholte, Globalisation: A Critical Introduction, 168 (New York: St. Martins, 2000).
80
Beck, What is Globalisation, 49 (Cambridge: Polity Press, 2000).
81
Supra note 50, at 147.
82
Supra note 69, at 86.
83
Supra note 69. Well the CPI (M) can be claimed as a party sticking to its ideals as it was the only one which
consistently voted against reforms each time a vote was passed, see note 53.

19
Finally, the third aspect the researcher shall substantiate upon is the political mobilisation that
economic factors such as reforms can garner. As discussed before, even the ISI led
development strategies did improve the standard of life of the people. Literacy rates grew, so
did urbanisation in general as well as the area of mass communications.84 The now mobilised
people took active part in every aspect of the political process; however the omnipresent
Congress Party was unable to handle this mobilisation which led to changing the party
structure in India.85 The reforms of 1991 continued this trend and witnessed a boom in the
spread of the television due to the coming of private channels, and greater social reform. The
search for an identity in light of globalisation has heightened regional tendencies, and a spark
on ethnicity amassed the potential to divulge society in flames. 86 An interesting point here is
the mobilisation of labour, and the relative powerlessness of trade-unions. In light of
increased liberalisation, trade-unions have been unable to present an alternative solution
which factors worker interests and industrial competitiveness; they failed to provide ideology
and move case-by-case, continuing their critique of the reform. 87 As every party in the
spectrum moves toward thoughts of increased labour rationalisation, trade-unions are getting
distanced from the political debates and discussions. As one leader puts it “Trade unions are
no longer on the same wavelength as the government.”88 This void is now getting filled by
primordial and particularistic organisations, shaping the way politics go.89

84
Literacy rates grew by about 8.54%, almost 75% of the population was within television transmission by 1990
and 27% of Indians were part of the urban population in 1994. Education statistics taken from Selected
Educational Statistics of the Government of India, 6 (1997-98), Urbanisation data from UNDP, Human
Development Report, 87 (New York: Oxford University Press, 1997) and television transmission data from
Farmer, “Depicting the Nation” in Transforming India, 266 (ed. Frankel et al. New Delhi: Oxford University
Press, 2000).
85
Supra note 44, at 122.
86
Supra note 81.
87
Chowdhury, “Public Sector Restructuring and Democracy: The State, Labour, and Trade Unions in India” in
Critical Issues in Indian Politics, 405 (ed. Mukherji. New Delhi: Oxford University Press, 2007).
88
Ibid at 407, during the author’s interview with Ananta Subramaniam, President, All India Trade Union
Congress, AITUC Bangalore Office, 1999.
89
Supra note 69, at 78. This can be used to explain the growing departure from the patron-client system in
politics and thus the resultant shift in the working of the political machine.

20
CONCLUSION

Tracing the development of the discipline of political economy, one sees it came a long way
since the time of Smith and other classical economists; from a predominantly economic
understanding today there is recognition of the mutual nature of the relationship between the
two disciplines. With time the effect that economic conditions of the land have on how it is
run, how people think it should be run, and analysing how efficient are the decisions made in
light of resource constraints was elaborated upon.

The researcher discussed at length about the political economy of the economic policy
change India witnessed post-independence. It was seen that the only reason reforms were
successfully implemented in 1991 were political, Sas data showed India could have managed
with non-adjustment loans as well. How economic factors impact political life become clear
upon investigating the reform process. Not every economic factor has a great impact on the
political domain; some remain confined to elitist circles while some directly and quickly
affect people have the ability to stir political emotions. Reforms significantly affected the
nature of federalism in India, its political attitudes, and also mobilise the people. The
researcher also elaborated on the international nature of the reform, due to IMF and the
Bank’s involvement

Thus to conclude, the researcher would say that political economy being nothing but the
result of interaction between its constituent disciplines can be felt everywhere, and greater
assertion of the economic on political debates shall serve to further the development of this
discipline.

21
BIBLIOGRAPHY

ARTICLES

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Delhi: Oxford University Press, 2000).
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Indian Politics (ed. Mukherji. New Delhi: Oxford University Press, 2007).

22
 13) Patnaik & Chandrashekhar, “The Indian Economy Under ‘Structural Adjustment’” in
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Federal Market Economy” in Critical Issues in Indian Politics (ed. Mukherji. New
Delhi: Oxford University Press, 2007).
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Economic Reforms in India (ed. Mooij. New Delhi: Sage Publications, 2005).
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BOOKS

1) Drazen, Political Economy in Macroeconomics (New Delhi: Orient Longman Pvt.

Ltd, 2004).
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23
 6) Cohen, International Political Economy: an Intellectual History (New Jersey:
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WEB BASED SOURCES

1) CIA World Factbook. Source: https://www.cia.gov/library/publications/the-world-

factbook/rankorder/2173rank.html (14 December, 2009).
2) Douglas Harper Online etymology dictionary: Economics. Source:
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2009).

24
 6) The World Bank. Source:
http://siteresources.worldbank.org/BODINT/Resources/278027-
1215524804501/IBRDCountryVotingTable.pdf (14 December, 2009)

IMPORTANT AUTHORITIES

1) The Constitution of India, 2008.

2) Lok Sabha Debates, 296, 31 July 1991.
3) Lok Sabha Debates, 5 May 1993.

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