CHAPTER FIVE

FOREIGN ECONOMIC POLICY M THE ERA OF GLOBALISATION AND COALITION POLITICS: FEDERAL INPUTS
he contanporaiy world system is undergoing a fmncndous transfomtian

and one of the issues being seriously debated is the impact of economic

llbcralisation on the interface beween federalism and fomign policy. The

prcssurcs for faded restructuring have grown subswtially. Fiscal federalism,

In particular,

h grown into an area of abundant interest. The concern for u

fiscal dccentralisation has been prompted by the stress on market arising from cconornic liberalisation. As a result. there has been a p a t c n k t on the ways In which the wo levels of the Govcmmcnt-- linion and the Slates.. interact among t h e m ~ l v e s with other national and internstima1 level acton. and
A federal scning is characterixd by a close rcl~tlonshipbetween [he

ldcological stance of a regime and the concept of thc "levels of Govcmrncnt " The more a regime is positively oriented to\cards wcllarisrn and regulated growth, the stronger is the possibility for the linion level la grow powerful MJ hence the chances for the mergence of Mime sun of' a "hcgmonic federalism." On the other hand, thc morc a rcgirnc IS lihml. and related to h e ~nsrnunntalvalue of the market economy. the more there
1% the

pcnsibllin of

intn.gwemmmral reladons being bared on d c c e n m l i ~ dnetworlring mrha

lhan h i m h i u l control.

'

A d Ray, "New Economic Policy ud lndun Fcdcnl~rm,"Ikonornu ond Polrr~cd WrrUy (Mlmrhi), vd.27, m.4,25 h u r r y 1992,p 147
167

'

A s i g n i f i ~ tw i r b l e in this eontext it dK M of the crisis

ppclling the need for a m j a economic policy shift. W h a ~ v a m o m i c m

msh arises 8s a result of marka failure, as was in the use of 1929 depmsion,
thcn arises a danurd either h m the public or from the d i n g c l r u a or hm
h h f a a p o d national Government to regulate the chaotic market forcn. x

thereby necessitating a mppmisal of the pn-existing priaritics, raulting in r new policy priority of growlh-cum-welfare statism, as was embodied in the
Arncricdn New Dd.This has h e effect of strengthening immcdia~elythe

mtlonal level Govanmcnt and later generating a strong ccnhliring tendency

In

the working stnictun of inter-govcmrnental relations. If the fallwe of thc

t i o v m e n t nh r rhm that of the market forces, gcneralcs r cris~s,on thc te other hand there m y be a demand for dercguiat~onand rrstoralron of market autonomy. Concumntly, there may also be a hostile public nrctlon agatnst cenuali.5cd State control.
Towards A Federal Market Economy

In India, the mounting economic crisis in 1990 had

ttu roob

in Govcmrncn~al

fallurc to regulate the national economic forcn. Hcg~nn~ng ~ndcpendencc, w~th Ihc first Indian Prime Minister, R. Jawaharlal Nchru envisioned
I

modem

Indian economy that entailed ccnmliscd planning To achieve indwuial hc

mdc b e Planning Commission. with thc Prime Minisla u its h d , r k y
uutitutia. While this approach to dcvclopmcnt helped lndir in building

-i n

it on led to an economy of -icy

161

and caruption. For, the

a @to m

~~~c

of society by giving 8 -ding

p i t i a n to h e S W i ngulating the economy reduced incentives for cost n duction md CPJdiV i m p t o m c n t and instcad prompted cnuep-un
past the prlms of politician3 and b ~ u m t to get licence q u o ~ s for

to

prodUc0.

In addition lo 'the Ii~Cncequota-permitraj,' the crisis owed much to bjiv Gandhi's massive milimy modernisation programme of the 1980s. For
IWO

wNeCUtive years, India s p a t more upon weapon purchase h a pcrhrp

any other c o u w in the world. Wilh the Govenvncnt of India doing away
w~ththe British raj-inherited fiscal consmatism hat continued till then, India's debt burden reached ominous proportions. This war a result of

annual fiscal deficits and patly a mull of succumb~ngto the Icmptations hy

comrnmial banks.' At the Stale lcvel, deficits owed much lo h e populisl pollcics and
programme and their faulty implcmcn~on mulling in badly U g d re

subsidies, administrative pricing and labour redundancy f h c ringlc lugest drain on the Sutc exchequers had been the State eiecvic~fybauds, which ~ncurrcdlossa around 10 per ccnt of the State plans in IW? [hat m x to 30 pn cent in 1999, In 1994.97, the commerc~ell a s m of the Stale clcctriciIy b o o r 6

' Lloyd I Rudolph, "The Fdtming Nowuue: b j i v G&

rt Horn md Abmd," m M a d d l M . h m rrd Philip K.Oldcnburp, &. Indm 19rkPng 1989 fiew Yal;: W e a v i c v R y Barlda,TheAbiSocicly. 1919).

unwilling to pmvi& fix user charges for wta supply, irrigation and t~cccricity. While some States provided m?e electricity to f u m e n some
only nominally. Thne was also the problan of unmcaed or stolen

tl~caicityas 8 d

of which the loses were estimated ra k romcwhu near

40 pa cent as per tfic a t i m r t a of the then Powa Minister. P.

~umanmangalam. a c o n f m c c on Inhasrmcturc DcvelopmcnL held on In

16- 18 December 1999, which was sponsored by the Confederation of Indian Indusaia, Rakcsh Mohan pointcd out that out of the 14.7 per cent of the GDP that the subsidies atcounted for; hardly 4 to 6 per cent could be jurtificd in
t m of helping the poor to whom the subsidies were primarily w a d .

Ahluwalia ably sums up the crisis thus:

Ova the years both the Ccntn and the S b l n have seen r burgeoning of non-plan expenditure in the face of inadequate buoyancy of m c n u n . They have responded by rewfling to larger and larger voluma of borrowing. 7he process has led 10 a steady build u of debt, which in rum has generated 8 rising interesl burden.

The rise of an ovetgrom natronal Ciorcrnrncnl u ~ t hib enormous economic power such as industrial licensing and other tcgulotions resulted in a
r l W l sUangulatia of the market economy. Not surpris~ngly, India wlu deep

into dK

of 111 ccamnic &is by 1990, which nrhed i b puk d 6 n g

~pril-July1991. The fisul deficit puked at 8.4 per cent of the GDP md &
nv of inflation hop@
011

16.7 pa C ~ L The Gulf war woRaKd the s i ~ t i o n . ' rise. The remittances from lndiuu working in the

p r i m witnessed 8

Gulf also declined. SO did the expod to the Middle k t . India's d i t .

withinas declined. Fmip exchange mcrva touched a new low of b.

1 a66 m,as

on Jmuruy 16, 1991. For the first time, the G o v m e n t of

lndia had to m a a g e gold physically to finance ib naeuary foreign exchange tmnsrction~.~ devclopmenls thus bmught the countp on the The verge of default in respect of external payment liabilities. I h c crcdibil~tyof lndia in the intcmationd capital market nosedived and the intcmat~onalcrrd~tn~ingagencies l o w e d India's rating both on lonp-tm and shon-term borrowings. The crisis could have been avmed only by borrowing fmm the
1W unda suvrdby m g e m m b and other e m c r p c y mearum to mmct the .
Imports.

The Govanmen1 of India initiated macro-ccrmomie stabililrt~onmd

suuchlral d j u m c n t propmrncs through iu Ncw F.cc)nomlc Policy The policy c b t c r i & by economic liberalislion, doing aw8y wirh dK

' % . K.G.S1JudcMn ud T P.Madhuraodanm,Slondcvd and Pmr'r Thiriprlnjrr, I So~reign Credi~A d y s u lnd~o (New Dtifu. StMdrrd ud P a n ' r , Augwl 1996) d m see, A.C.M&he, TTbc S m u M . l Adjustment In lnd~urEunomy:The IMFWB M & of C h in S. Muny, ed, Stwfwal T r m j ~ t o n Ind~an h" of kormrry @rlhi: A t W c Publ~rhm 19%). pp.29.35.

Spamit-liM

an w i n g r c l i u ~ x M e t . Thc New Indusairl on

policy significantly liberaliscd the Industrial Policy Regime in the country. tspecidIy u it applied to Foreign Direct lnvaanent (FDI). The tn&hid , ~ ~System lin d l indumies was abolished except f w a few stnhgic a a

mvironmcntally sauitive industries. This d i s m l l i n g of h lndumial

conhol Regime provided a window of oppomurity to the S u ~ c o m r n c n ~ . G

Equally significant was a marked destine in public investment u a

consequence of which the Union's financial leverage declined The Union
(iovemmmt was no longer able to finance large capital invnments L r e ag -

scale external and i n t m l deficits as well as rising intcmt rates constrained

f r a borrowings.' In 1998.99, interest payments as a ratio of h e Union ut h

revenue receipts w m 52 per cent.' Union's deficits and the i n ~ m s payment t
that it entailed ma& it inmasingly difficult for it to help the Suter through

mvatmcnu. The Union's gross assistance to Statat crp~lal fomatinn

declined lrom 27 per cent of the Union's m e n u c expenditure in 1990-91 to I2

per cent in 1998.99.' Some of the States seemed to hc ready to mkc rdvmcrgc

Ma Govcmmcnt of. Ministry of Finance, Ecomrnlc Dtv~rtnn, i, Econamrc S v m y iu96 97 (New Dclhi: Minisay of Finance. 1997).T l l c !!, 'Caponenu of C m Filcli Dcfxit of h e Central Govemmm!', 19. the m c for 199Y.!OM), Table ? 1, 'Trrndrin P m m c f m of Deficit of Cmml Gov-l', 27

of this decliae in

Union chmnunent's a s s i e to pursue p r i a i n m a t

their own.
But these economic forces only pmially explain the i n 4 role of

states in intcmdonal economic sphere. Thc shin from a 'single dominml

psny systan' to a coalition regime, whac the lrcgionrl p u t i a L v c corn ro

~cld considerable political clout has contributed to it. The dmlinc of the
congress as an umbrella political organisation multed in the fragmentation of

the national polity md the rise of regional partits. For instance, in 1989, the
national parties had among themselves nearly 80 per cent of the toc.1 vole

shan that came down to 67 per cent in the 1999 Lok Sabha clcctions. By
contrast, the regional parties, which accounicd for ncarly 9.28 per cent o f the national vote in 1989, ended up notching IU much as 26.93 per ccnt in 1999. lhcir tally in t m s of Lok Sabhs scab har, cvcn been more impressive. In
1989, they won only 27

seats. But in the I999 I.oh Sabhs clcctions, his ligurc

to 1581 a d in the 2004 clcctions to 193." fhc Natimul h o c r a ~ c Alliance (NDA), which formed the (iovcrnment aAcr the IW elcclions,

lo

h~haivcs 19%

Uec/~onrtn Idla hfi~~w W ~ Nand . w & V Elmion Commission of - 2OOOOJmDelhi: Eltcuon Commisr~onof lndir 2000).

"77WHindu. 1 5 ~ ~ 2 0 0 4 .

included 120 h' fs l hv-t

h @ e State

me$. nature of the Vrjprycc The

a k slid to be r 'federal codition.'" n

m d h t i o n in polity and economy thus s m e d moving in mdcm.

The decisive shift ha single dominant parry s s , & w)lich he ym

successive Governments led by a single parry, i.e., the C o n g ~ pw, engaged rhCnWlveS in r centralid planned economy, to corlition iiovernmarb at the Union have made regional and Strk-bucd decisive players in politics as well as economics. Ihough the causal f a t o n resulting in a liberalised economy and the ushaing in of a coalitton en havc not been the same nnd arc independent of each other, but once in place, ~hcq. stmcd interacting in mutually reinforcing ways. Even the B M y a Janatr Puty (BIP) and the Congress converged on h e inevitability and necessity of the economic rcfomu that afkrdcd greater autonomy to the States to atmct foreign ~nveslmcntr to punuc the~r dcvclopmcnd goals, The dominant view within thc nrling Cangms Pan) of the early to mid-1990s and the BJP of the late 1% snd W n havc nd

convngcd, it w u the Congms, which iniuatcd the refamu in 199 1 . Despite

:Gmeral Electiom 2004 h v c also b w n up a cdluon C i o v m t conr~nin# of

pudn like thc Indim h'uionri Congnu. the R.rhVIya JUW Dd (WD), ths T c l e n ~ m Samithj (TRS), h e Natrodirt Cmpu Pur). (NCP), W Ihc h v i & M-tn (DMK), P ~ M I u KWdu (PMK).Ihc the Mmunrl.tchi h v i & k h a p m (MDMK), Ihulihrnd M k i Motcha ths ut tJMhi), ttw h ~rnuhhi k parry (UP), J b K Pcoplc'r t ) a m c m c Pry (PDP), the ar tbr RcprbiiaD Pry of W - A (RPI-A), md the Muslim h g u e (ML), having the ar S r m y d P ud rbe lbhoiv L k M. w o ouuidr oftbe ~ c f front, t

~~

Tbtrhgmmkdrlli~rchr~~p d p ~ ~ w h r c h h a ~ g a uurunong rc r71 t c rl . h m cw

io early ~ Q M C I to WdCJk"the BJP could not &st B

he p

m of
thinking

llbcnlid~n

it m

e t POWa. It Was the dam-1 &hi o

to

within the BJP

led the RSS

push Y a r h w ~ tSi& as the F i m c e

Slinkter n t b than n ~ l a t i v c l y ~ globalisation-fiiadly Jaswan~ Singh, who king cmsidaed rt that time as the Rime Minister Atal Bchari Vdpryec'r iavourite for the Finance Minister's post. Later on, even despilc swuincd

opposition from the RSS and Swudeshi Japan Manch, Sinha tilled towrrb
lrberalisation and structural refonns. 'Ihc I998 budget prcxnted by Sinho sought to encourage the local and non-miden1 Indian (MU) in\.cstrncnt by ~ncrcasing tariffs and reducing incentives on foreign invcsuncnts. Hut pdually, the BJP starred moving towards a pr*rcform policy. Slnhu stancd espousing the cause of privatisation and labour rcfonn,. I h c ~ovcmmenl abolished quantitative mtric~ions cncoumgcd porfl'ol~oand lurc~pndircc~ and m\ntmenc. This marked n distinct shiA in the BJP policy. l h e UJP justified h e ncu policy in the name of keeping the NDA togclhet and thc Ciovcmmcnl going on. Earlier, Advani had accuscd the Congress tio~CInmCn1of hiving mined i the .+EnranSchool of Managcmcnt." But Iht RJP t ~ l l m c k a n r

deal with

multinational during its 13-da). sla) In power.

SuPW'ng

monomic nationalism w e n g d u I I y marglnal~xdin h e BP. Ihc other Qn

h d
Gurus-Y

6rieadly NX-Singh h f ~ ~ t Singh M l u d i h & ~h ek

to head influential economic policy C m i a e c s . he

s~,odeshi Jaran Munch could not be able to obsmct the policy of dlosing
100 p a Cent

investn'imt in tobacco and cigarette products, inid&

by

he Industry M i , Sikandar Bakht. The BJP Icd corlilion Govnmmt i m n moved decisively tad economic liberalisation. 7he new f d m l (jovrmmmt under the I d e f t h i p of Dr. Manmohm Singh, who inwuccd economic n f o m u in the capacity of Finance Minister in the Namlmha Roo (;ovcrnmcnS i likely to continue with the libcralisation drive, though in s somewhat diluted form due to pressures fmrn the Len Front. India has thus moved away from "command and control cconom!" ~ouardsa "federal market economy"14 under which the S~atmhnic come
10

command a largn shm of economic sovereignty thnn they d ~ d enjoy eorlicr. Ihc States have now become the principal arena o f invmtment. Ihc role of Ihc ['"ion Gov-ent
has undergone a uansformation from an intmcntionin

Slate of the ' w i t - L i c e n s e roj' md centrally planned cconornlc era to r regulatory state of the liberalisation era ~wlesi f i d n

- a Starc that seek t dlsctpline

and ensurc accountab~lity and mlrpartncy in

been 4 by Uoyd I.Rudolph ud S H o c k Rudolph. ! h ''The : shanng S O V ~i IMia's FcdaJ W n ~ b, l ~ & ~ ~Economy," &o-ic & Poiuud WrrUy), ~01.36, 18, M.y 5, 200 1, pp 154 1 no
S!.

&a T& cmmd

gi\a

cmtrol economy of the preform p a i d hrr labelled 8~ 8 'fedarl m u k ~ c ~ n ~ n y ' . c

to wht

C m to be QC

chief Minkem

Actors in lnttmrdonal Economy

The ~ltnsimhaR ~ o Govcmment had initiated economic r e f m primrrily due to Govcmmmt ratha than market failure. Such a w e of Govmunmul failure generates forces in the dirccdon of dcccntmlising power This had a deep and wide-ranging impact on Indian federalism. Accordingl!. there h a
hcrn a d u c t i o n in the role of the Union Govcmmcnt In the realm of cconom)

and the States have gained autonomy. As the command and cmtraliscd cconomy has given way to a federal market cconomy. the States and their Chief Ministm have come to play a leading role in the sphere of' economics Since the 1991 New Economic Policy (NEP) libcraliscd lhe Indian economy
and opened the floodgates for ms-nat~onalcorporatlorls, the new capcml

conscious environment has inspired several Chief Ministcn to go global in search of foreign investment. They can he sccn lciid~ng high pun dclcgatioru, consisting of Slate finance snd industries Secrclnricr and other oflicials and businasmen to negotiate w~th leading indwtnal h o w and thc addressing some group of indust~ial~su thc objecti\e of accelerating h e uith

pace of industridisation in heir m p e c 6 ~ c Slates.

This incompctilion mong the Slalcs f a inctmuionrl u(en~m

and forcip capid investment has attracted cmiderablc m d u anention u well. Welcoming foreign statesmen and invaton and funning abtod to u w

urvatas kif to @ve

p of l p

StrteS Chief Ministas ue often seen on the hant

newsprpaq mrg&m~ and television screens. While N. K. h a uses

'tlying Chief Ministers' for them." Zh Ahmed hyeed calls than am
mw,

b e

tla-Kaing Chief ~inistcn."' They arc vying with one m a h m to

I n v m t . The Chief Ministm of Wat Bengal, Orisa. Madhya Pndnh,

,An&

Pndesh, K ~ t a k k h h t n , Tamil Nadu. Kernla, Delhi and M

several other provinces have been crossing the hontim several limn with he ostensible purpose of attracting foreign invcstrnent. The various State capitals have also bear attracting world leaders and leading industrialists. If Rill Ga~es and Bill Clinton visit Hydcrabad. Yashiro Mori and 1.i Prng make it to

To begin with the southern Slate of Tamil Nadu. the Oovmuncnt of India, the Govmvnent of Tamil Nadu and the World Rank signed an agmment on 28 August 2003, to facilitate implcmrntat~onof the Rs. !,I I8

c r w Tamil Nadu Road Sector Project. The Tamil Nadu (jovnnmm~felt the
need for this financial wistance becaw of its dificult~esIn malntalning and ~mproving the roads. The multilateral agenc)'a Roard of D~rcctm had approved the l a rppliation from the State Govmmrnc earlier. Nearly three.

I'

Ndini Krnt

ma

CaMdirn Expri-" b k r 1999, p.7.

"Foreign Pollcy Maklny In Federal S W . T k MIMMd India plorrerlj (New Delhi), vol.55, t 3 & 4, July. m

forrrthoftb:*c~~tokfinancedby~Bank

in thc f o n n o f a ~ ~

while the nmrinda has to be ~0fIhibutdby the S ~ t Govcmmarl.17 fhc e sutc Government has also submined another appliation to the World B* for an a l l ~ d o c of Rs. 650 c n for Health S y s t a Developmart Rojwl. l m ~ccording one repoh the State has ken inching towards the top slol in to foreign direct rpprwais. With many incentives and single-window s c h m a in operation, officials expect Tamil Nedu to become the lop State In artncting
~nvestmeats from abroad."

Similarly, the Govemmmt of K m t a k a signed r Memorandum of I.'ndmtanding with the World Bank cornmining itself to c f f ~ refoms in the t governance as well as power sector. During the second halt' of the 1 Ws,e h State became the third largest recipient of Fomgn Dtrecl Invcaunent (FDI) among the major Indian States. It accounted for nearly 19 per colt or b e F1)I approved to the top six recipient States. Kamalaka's achievement In the cuning-edge
arcar, of

indueial development such as information lcchnology

and bietefhnology m also widely known. Bangalore, for example, has

earned the Ariqud of India's 'Silicon Vallc) ' and 1s m o g n i d aJ sufh even tho~e live in h e "original" in the USA. The State har km able to woo who
1

1e -

n u m k of multj&ond

companies. Kamataka's Econon~ic

I'

7ht Him&, 6 Junc 2003.

I'

W T i 4 bulplin Pays," 7 Hindu. 31 Much 2004. k

-R
ninfaccd

fa $150 million, n e g o t i u with

S W ' S commitment to s m

wdd

nf-.

the Left @ a

rule West Bengal and they criticisc e c o n h c

r e f o m the Chief Minism of W a t Ben@, B U M & Bhmrchjee. concluded r ~ucossfulO r of Italy in a r t y June 2003. Hc signed two tU

u of Undentanding (MOU) in Ihly. The Chief Minis~crwas m s

a m a d at the advanced techniques employed by Gucci, onc of thc world's

topmost hshion howes. Gucci showed intnrst in w i n g up shops in the coming-up leather complex in Banlala, which is on the eastern h n g a of
~alcunk"On 12 January 2004, thc Italian Consul in Calcuna had a m c c ~ i n ~

with the West Bmgal Chief Minista. Coming iwt of h e medng, hc s i ad "Back home, they uc excited these days about Ren8al because of the opportunities W an coming to view." Hc funher s a ~ d an Italian husinar hat delegation was insistent upon keeping West Bcngal in their all-India tour ltincny and one of the delegation's must rce sites in Calcutta would be the world-clau integrated leather complex at ~ a n t r l n . ~ ' Bhutachrvjce's attempt at industrialisation got further boost when Britain was rep&
(4

considering an alimaled invCmmt of k. 1.500 of R m y l .

in c x p l d n g m h e par resewn in the coal mining

Also, Mt~b's 1luoding h

of lndurtriri Dcvcl-1

which

e wdfrn m

a fw the poa in M p I . showed serious

~onsidartion NOof West Bcngaj with

md a& n

-s 1-

one fw plm

for fif w h e vollmtyl r r t i m t of a luge chunk

of the idle workforce of identified d u o n i d l y sick Sutc Public S a o r U n i ~

(PSUP).

Not only the British but wcral Japanex multinalio~lssuch u

Mitsubili, Marubeni and Itochu arc also bidding for high- value

infa-

projects in West Bengal. I h c Chief Minister. Budhrdcb

Bhattechajec, has suggfiitcd to Mitsubishi to build a towshtp with golf facilities in the beautihl Min Island in !he Bay of Bngrl. llochu has brm

keen on c o n s m t i n g the elcctrical.magnetic railways in Calcutu. The

Japanese arc also showing keen intern1 in [he metro railway, in h e slrttch

bcnveen Rajarhat in the uutcm fringes md b j a ~ l in How& dbmct. a

The maximum investment made by Japan in India has been in WUI Bmgal. They arc intemtcd in Kolhtta m d Haldia. h e norrh-south comdm and widening of the National ~ i ~ h w a y s . " Budhadeb B b h a r ) e c also had a very succeufbl intmctive session wtth ~ a a dl i p l w in Dclhi at the *rd of whtch mrny h&
mhioru ex@

of fmign

thck intaut in visit~ng

The India-UK Round

~ablc a
countrig, amrd

~UUUI

fa a high-lcwl civil

society intenction

botmar
its &-

its ~ ~ U N S Shelp West to

&n% out in

immmt

in h d u s t ~ 'and ofher developma1 pjects. ~ o r d

~warajPaul, a UK Round Table delegate, described Wclrt Bcnprl u one of .the mort m u n g " provinces in the world, which b a lot to ornu. Referring
10

the most recat UK assistance to bcaudfy the riverfronts of C r l c u t ~ wid he

that the Round Table would extend maximum usisuncc to the Sate ~ o v m mtt attract invcsh~lent." o

In reemt months, West Bmgal has bm ahle to mmct a s t m e stream

of invators lrom countries such as the USA, the

UK, Gmnany, France. Italy,

Swimland, Denmark, Indonesia and Malaysia in sn.lws such as Imthn, p e m h m i c a l r , water supply, food processing, agri-business, infnsvucture
and, of c o w , information kchnology. Britain lops h c lis~ offering a Im. by

fold in-

in fund-support. IBM is also planning big stakes Pcpsi has h e n

planning a unit. Samsung has already made some investments. Thc State p l w to k m o n g the top t m states in information technology dcvelgmcnt by h 2010. he swis rlso exploring the possib~liuesof gening Chin= suppofl 10 help dewlop the SUE as a my manufacturing w i a l of the eountv.'' In mder
to improve the invesment climate in the State, ilr Chicf Minister, Budhadcb

B ~ W ~ , called upon the trade unions to fashion out n m n methob

of bac@h7 m i v e

rJ

the

~CfJwdS of

g~croas,dhww ud a h fomu of

which were uctauivcly anploycd by than in the Eightia as pan of collective bugtinin& ue w~of sync

Sixtie, Seventies
now.

E m

the Chief Ministas of backwad Statn like Bihu and Unu

Pndesh arc trying to attract foreign investments. The former Chief Mlnista of'
Bihar, Moo Pnsrd Yadav, for instance, visited lhailand and cxhihot.lcd his
hosts to invest in the land of the Budha ( ~ i h u ) . "Similarly, the h a UW

Pradesh Chief Minister, Mayawati, undettwk a ten-day tour lo the US in early

July 2003. She assured the ptwpcctivc invaton from the Un11cd Suun that there rms no political instability in Uttar Pradesh. While addrns~ng e IJnl~cd h States-India Bwincss Council, shc said, "I assure you if you come lo UW

Prsdcsh, you will get all possible cooperation und suppon from my
Govmuncnt at way step and gcc a completely hassle-fm cnvlronrncnc lo

work in.... We an wing to crate world-class infrastructure facilitln in lhc h e of mbitiou project5 that LhC SUtc 11 pursuing mclude: four
8

special mnomic ma, where industries will get

number of h e f i b a d

f~ilitia, specially those m i n i n g to l&OUr,power md k x a .

In W
with

hejuthn Chief M i h ,

w fd q o

three of his C.bimet cokq'ucs,

went to New Yal: in Jdy 203 to atlad

an b , d d -law

to rttnct tm-mident Indians to inmc Gthloc t.

in b j & m ,

& i e the p d m of invement in the rds

k.1 cawe

rlso

,bout

conhib~ti~n the Rajuthuri Association of Nonh Amcricuu by

(RANA) tovmds drought relief."

The Chief Minister of Gujvlt, Narcdm M d i , has

making his

own e f f m . Though the State earned a bad name due to post-Godhra rion.
Modi, on 18 August 2003, addrased a meeting of the "Friends of Gujmt" in

London. The attempt was to market Gujsnt as an ideal dcttination for the Non
Resident Indians ( M U S ) . ' ~
This is but only a small account of the Slalc G o v m e n U going whole-

hog to woo investors. The account docs not cover thc entire pnl-libcrslisar~on period. In fact, the ancmpls date back to 1993 when the Sbtc of Mahmhtrn fint began this process by entering into the negotiations with the Texas energy giant, h ta build a $3.5 billion, 2000 mcgawan power plant in ,
M M m . On 8 Dccmbcr 1993, the Government of Mrharsrhm and the

w h m
~g-t

Stale Electricity Board ( M S i 6 ) signed a Power h

with Enron's Indian subsidiary, the Dabhol Power Company. The prwided for the supply of 200 mepwan of power. Economic

lnJyw dcscri'bed rh'i a g m m n t a ow of the l u g a t contncts (civil o r

rnilitay) hr world history, d the single l u g a t contract in (India's) history", invdving a t d nnrgy investment of 53.5 billion o m a period of twenty y , u estimated in 1996 on the basis of the then prevailing indexed m m4 fuel cost% S34 billion o v a the m e paiod to k paid by the MSEB to

The Govanmmt of India at k , t played a supportive role in this event.

In September 1994, it provided a savmign counter-guarantee, a decision that

it later on came to regret. The Cabinet Committee, the Finance Minista and

the Central Electricity Authoriry opposed this project right from the beginning. The World Bank also opposed it. But the Maharavhtra G o v m c n l pushed thc aside the Govcmment of India. Instead of using cnmpctltlvc b~dd~ng,
Mahuashtm

Government

negotiated

non-transparent

'memos

of

Critics labelled this action of the Mahamhtra Govcmment n shady.

foolhardy and illcgd. The behviour on the part of thc Government reflected

"a papauation of the old command-md-control habits' and an inviution to

" Abby Mcha P w r r Play A St* of tk Enron Projrcf (New Dclhi: Onent Lmpm, 1999). Also see. G. bghuram. Rckha lain, S i M SlRhr, F'rcm Prneovr ud Sebastian Morris, &.,Infiarnuctwr D M l o p m r ~ F ~ m r n gTowards A and P 3 1 w P m Pmnwrrhrp (New Dclhi: Mrrn~llm,1999).

'si&& swmw in Prime Pomr Projects: Dabhol z Rmtm m Equity Power Rojcci Compny- A Case Study," in G. wm Rcthr Jrin, Sidhnh
p~

S& Rtm P&Q@r& s c b i m M r i . &., I ~ + o Dmlopllc~nland ors I ~ Finacvg- T & a Public- P r ~ Pmrmthrp (Nw Deb: M m l l m . 19991, r
161-69.

am7Jph.l' psitim u its

U
S0WCign

t of

India d 0 felt to be i m -viable S n

d makt it financially liable, if the

~ovnnmcnt MahuaJhm I M3rrvrshb0 Electricity Board could noc ply its of bills f a the hi& cost electric pomr purchase commitmat o v a a conma

pcriod of twcnty

In Febniary 2004, the M h m ~ h t r a Government's announccmcnt that

the Swc wwld makc efforts to ram the shutdown Dabhol Pown Company

(DPC) project has led to the revival of the debate. There is a demand from
u rm several q a t that the State Government should publish a White Paper giving complete details of thc new deal making and the cost tha~will hc incurred by the State Government, the Union Govemmcnr and their agcncia." The E m n saga. thus, continua to rivet the country's anenrlon. 11 has revealed the up as well as the downside of State autonomy in a 'federal marka economy.' The opportunities provided by the diminished role of the Union Government in the m l m of economy may be seizzd by the States lo make or
mrr their own economic destiny. The sharing of the cconomic wvcrcipry and

decenmlhtian thus caries with it both hazards as well as opportunities for the States.

" Amulyr Reddy, 'Lawns h m Enron," Thc Hindu, 6 Jrnuuy 2001.

Y ~ ~ , 7 ~ ~ 2 0 0 1 .

" ITw HlndL. 17 Fekrny 2004.

n c Pafhrning Chkf ML.bter or A hdtk Frccloldim~ Jrmkehr: n Cue of CluIclnbaba c

our d i i i o n of the role of the Chief Ministen in amcling foreign

i n v m a b will not k complete without a special mention of the role of b e former Andhra M e s h Chief Minister, Chandrabbu Naidu as no othcr Chicf Minister has attracted as much anention as him. He manaped Bill Clinton's and Bill Gates' visit to Hydcrabad. Clinton's visit capped Naidu's relentless

efforts to be viewed as India's best performing Chief Minista. Fmm Dallas to

Davos, he strove hard to promote his ambitious plans and projects to mnsfonn

Andhra from a middle-level to the top-ranking ~tste."A3 a leader of one of

the growing number of politically-successful State.lcvel panics, the l'clugu
Dcsam, his efforts to promote and ux infonation technology caught the

national imagination and xvcral other Chicf Ministers adopted Andhn mtdel of dcvelopmcnt in their mpcctivc State. He replaced the octogenarian Jyoti

Basu, the West Bengal Chief Minister, who wlier took the lead in
aggnssively wooing the invatom." Euphemistically called the CEO of

A n h Inc., Naidu's dream to convm Andhra into a frontline dcvcloped Indian State, made him undcniike many ovmeas vips mecling heads of
compiled by Bvrrrvu Todoy,which rmkr 26 rcording to the pmrpoom of CEOs nboul S W invmmml dcrti~tioru, Andhn mnt up h n r m ~ - w n In 1995 IU the third in 1999. Also m,"Slate of r n d a dw Strtcq" Bwbvss P&d (New Dclhi), 29 D c b r 1999. e m c.
SW

" Ln tbc md d m g of tbc SUM u

" keanr Shh, * F m Swc to bbkci - v u Ihr Slate G o v m u , " paper

u t A J S O C ~ I Oo~/ A s m S t d u s Allnvol Mcatttig. Bonon, Mmh 1 I . 14, k
1999.

~ o v a r v n n e ~ ~ ~ ~ O i r n ~ ~ h y i n e t o ~ u p o n t h c
maits of choosing llrrdhn u an invatment destination.

On September 12, 2003 Chrndnbabu Naidu left on r six.&y tour of

ltaly m d lrncl as the hed of r delegation comprising Ministar and

In Italy, his plans centred on getting Formula one track for

~ ~ d a a b r d ' ~ September IS, Chandrababu flew to Israel w h m he On
partjcipl~ed cr seminar on business opportunities in the agricultural sector in in India. He also had a meeting with the Israel's Deputy Prime Minister
On 14 Janury 2004, the Microsoft Corporation lndia and the Andhra

Radcsh Government signed a Memorandum of Undcnmding (MUU) for h e

rollout of Microsoft Project "Sikh"in the State. I.V.Subba k o , Principal Secreuy to the GovcmmenL School Education and Rajiv Kaul, Managins Director of the M i m o f t Corpomdon lndia signcd this Memomdurn of Understanding (MOU), in the p n x n c c of the Chief Minister, Chandrababu Naidu. The MOU entailed setting up and m i n g of a Microsofi IT Academy ' c m m in the State to facilitate teacher training, which would be a world-class facility equipped with an IT lab encompassing hardware, software, curriculum m d sufff a effective delivery of educational facililiu and dministn~ion.11 d s o included formulation and implemenlalion of a comprchmive tcachcr-

aaining pmgnmw d o n of a loalised IT curriculum for studenq rollout

tcrrhen and Jtudmt tfholrrship pmlpunnra and sating up of a t u f h a '

Thi, wu M~C~OSOA'S second MOU, the f m t being with Uttrranchd. In
hndhn Mdcsh, the MOU aimed
It

covering four lakh studeno and o v a

wcnty thousurd teachers in Government schools from class 111 to class XI1
over a five-year paid." in Januay itself. Chandrababu also got S 342 million

from the British Government's Department for Intcmational Dcvelopmcnt

(DFID)."

But the critics allege that all this hype is not substantiated by the w l i t i a on the ground. Naidu's "misplaced priorities" cost Andhra dearly and made the State exchequer suffer heavy lossa. There was a yawning gap
between the promised and the actual inflow of cnpiul, From 19% to 2002.

though he boasted of an investment upto the tune of Rs. I , 11.320 crnre, the actual inflow was around Rs. 14.269 cmrc, that is merel) a tenth o f that. This
was, they pointed o u because of a muddled invntment policy and prcciou ~

little work on the infrasmctural front beyond some cosmetic touchn in Hydcrabad, a stifling economic environment created by an ovctcmmliwtion of authority, the failure to develop r modern pon and faciliutc long-term

YEAR 1996 1997 1998 1999 2000 2001 i 2002 *fieurcjinRs.cmrc

Remised FDI Inflow 11,018 9,571 24,645 2,838 2,346 52428 8,474

Actual FDI Inflow I,%1 1,377 5,562 1,119 1,014 1,670 1,566

They also alleged that Naidu evm failed lp upitrlirc on h e p m c c of

a luge Telugu diupora. All that he was able to manage was to plan a douk of non-mident Telugus to provide information related to job opportunilin a b r d to further the career prospects of Andhra students Crilicising Naidu as a "mirage merchant" his opponenu held that he could gcncrate only false hopes in the minds of the people through his false promises related to investment." Howwer, Naidu's supponers pointed out towards 41 projccu worth b.
1 7,204 crorc, including a Rs.12,000crore project for petroleum produclr by
Ihe US Truu World Corporation. Besides. Oracle planned to ser up a 7.5-acre

campus in Hydmbad. The Computa gimt, k l l , also planned t st up a o e

facility in h city.U e

Nwr

'bmowine

m' horn, be-

jot issue md

ocatpied 4 CefIUal

p k i the electonl politics of A n b during the 14' LO^ n

~ a b b the simultaneously held Vidhan Sabhr elections. The Opposition md

b Chief M n s e for mising a hopping Rs. 50,000 aotc in t e iitr m of

~oansduring his nine year tenure, thus "pushing the State into r 'debt mp' and
ruining the economy by making it dependent on the World Bank." They raised
questions about the backbreaking conditions, the secncy attached to iL the i n t m t rate and the debt burden on the people of Andhra for generations to come. They pointed out towads a document prcpunl by the Finance
Depamnent in December 2003, according to which the total borrowing stands at

Rs. 50,084 crore, of which loans from exteml agencies is estimated to k

RF. 8922

around Rs. 15,364 crow. Out of it, the World Bank loan is put

m. pointed out towards the worsening situation of the Sblc reflected They
in itr ranking in the Human Development Index when it has slid from ninth position in 1991 to the tenth in 2001." While these criticisms have Icd to the defeat of Naidu and his p a q in the Lok Sabha and hYscmbly clechms in thc
Sta

in 2004, the new Congrus Chicf Minister is unlikely lo go back to the

old days whcn provinces hardly played any role in guiding of India's foreign
economic policy. To be fair to Naidu. we may cancede tha~he brought professionrlim into politics. He conrwtly updated himxlf on the devclopmcnta the world

'' LVaJutabw-utu, "Ndu's 'Borrowing Spree' is Ammunition for Detrulon,"

% H i d (Cbamri), l l April 2004.

over through his visits abroad.

He rlso effcctivtly ncbmked with be A n d h

d i m Y INVESTMENT PATTERN ACROSS STATES In the post-reforms em a look a! the Foreign D i m t Investment (FDI) p n c m

State-wise from August 1991 to June 2002 meals that the top five Slrr~csin
terms of attracting ED1

arc Mhmh Dclhi, Tnmil Nadu. Kamatska and aa sm

Gujmt. They acaunl for 52 percent of the total FDI approvals in the country.

FOREIGN DIRECT INVESTMENT APPROVALS AUGUST 1991- JUNE 2002

States Maharashaa Dclhi Tamil Nadu Kamataka Gujmt Andhrn Radesh Madhya Radcsh Wac Bengal Total Amount Pcrcentagc 10'1 Total i Nwnbcr of (Rsin Crore) 4002
1990

48722.4

1973 I050 225 594 136 8932

j

4,bS

6.56 --;

1
j

Oi rm
Rest of the SW
U

and approvals

9227.3 8808.3 8229.0 95579.3

'

3.13 2.92 33.98

32,2

Source: Financd E r p r ~23 .December 2002. ~

Mlrharashm topped in amacting the inflow of FDI ever since 1991, when the
m a y opmd its d m to foreign capid. It attracted Ils. 48,722 e m md
bas about I7 per cent I M m t e t d FDI of rhe county. Despite r c f m , h h

hndhn Pndesh m d d mMa8e to amact only Rs. 13,092 cmrr of FDI, which
uorked out to 4.65 p m e n t of the total FDI in the country. Tunil Nadu and

d have done bena than Andhra P n d a h in tcmu of amcting FDI." a

The patinent question h e n in this cantocl is why arc inwtments

flowing only to a few pmvinca? The reasons for this may k varied Them is,
first, the mtc of rrtum argument. Firms opnating outside the public scctw are
driven by the ti urges of maximising the profits and minimising h e m t s . wn Investors try to enhance the efficiency of investment, which in simple terms

can be captured by the capital output ratios. However, in situations of

distoRions in the product d a coupled with the existence of inenicient

pricing, investments can yield higher profits. Thc bottom line, thus, is the rate of return on investments, Capilal flows into projects, which yield higher rate of rrmm." The rate of return, in tum, depends upon the Icvcl of infrutructurc availability to a great extent. Adequate infrastnrcrure contributes to the enhancement of productivity growh, which leads to a more eflicicnt utiliwtion of capital. In the Indian context, therc exist wide disparitia in b e availability of infmmcturc at the regional level."

'
rrmcting
invptmans.

paceptioa" too play m impatant role in

Potential inMtas farm expectation on the

fm u

sueam of income. 7hc importance of the paception of investors in g a niv

is aawhae sr evident u in the ust of Karla. In spite of a good

in-M

hvestm U C lrlUcUnt to ivt in the State. The mrjw rrrron is na

invesm' pcrccptifm =garding Ute churctcr of labour in the S ~ t c .In this

sense, thaeforc, an important issue relevant for the Slates is the necd for a
comprehensive labour policy encompassing the interests of both the labour

is market and product market. As demands h m the two we may bc

divergenf institutions have to define the m l a of employees and employcn. This helps t4 match the expectation of the investors wilh that of the workers. The State comes into the picture with a positive role in ptcrmoIin1 labour relations, shedding a negative attitude in dispute ~cfllemcnts.'~
And so, good governance acquim a great sahmcc. Succcsrr m

amacting foreic investment depenQ upon s vlsionq Icadmhip. The leadmhip includes not only the Chief Minister and h ~ Cabinet colleagues, bul s also entrepreneurial civil KNMU. Investments depend upon the boldnas,

imrgimtion and the tactical and the strategic skills of the burcaucnrcy u well
as the politicians at the helm of affain. Govcmments provide for a reliable legal systan. phpical infrruuuaurc, basic h d l h , education, civic menitia

d a mhl safety net thai secum people from social disruption endemic to a

marketieaffd yttan. Politiciutioa, t r m f a , Wr of rccormlrbility

lack of citiacn-oricnted govanance h

t the invatom. Many Smta thrt

have fired kaa on investment scale have ken able t do so b w they o have shown bolQKss in taking steps towards good govcrmnce."

But in a danocratic set-up, providing such a leadmhip and good

govarwce is not an easy task. Danofntic politics opens thc way for vested interests h t may stymie economic libmiisation. Under such conditions, Rob

Jenkins argues, politicians have to be able to "succeed by slcalth", conceding

form to p i n subst,ance, going around mthcr than confronting obstacles, invoking continuity in orda to bring about change." b c e to the Top vs. Race to the Bottom The race among the State to attract foreign invesuncnts has generated interState competition. This competition has taken rhc vinuo~~n of a me to form the top or the vicious form of a race to the bottom. Whilc the funncr implin ateacting investment by providing a skilled and committed labow force ~d good work culture, a g d inhastnrctu~, especially powa, trarupft communication a d good governance, the latter includes providing a vvicty of wnccssioru and incentives that attract investors but forces h e provinces to forego needed revmua. Offering incentiva to a w l invcstmcnt is akin to a

Rob Jcakh f&morot~c Pditw a d EEomnrc Rejknu In India (Cunbidgr. Cwbndge Univariry Reu, 2000). p. 176.

a w ' s dilamnr' in tbe m s c thu while it is collectively rational not to

give incentives to M direct investmart, it is individually rational to

proviad Gwermnmc provides f d for investment: f d , i.e., when the bs

Govanwnt reduce the tax burden for the incaning industry: and o m such h
as power tariffconcessions, wistancc with project d y s i s and design."

The pertinent question here again is, do these incentives really mnu and if so, how much? The mults of a s w c y of manegn 'bared largely in North India' but including the Southern Slate of Tamil Nadu show hat W e

n top ranking factors influencing the decision to invest a related to

inhstmchuc (namely tmnspon energy, tclecommunication~ and water)."
Acceding to the same survcy, neither financial, nor fiscal incentives ur hat

much imponant. On the other hand good quality infrwtructurc is ranked ar !he most important factor in investment decisions." As obrnvcd by the

authors of the w c y :
S w c y s and statistical anal)3is on the relative imponrncc of incentives o v a other dacrminanu rcvcol lhal incent~ves play a limited role in the FDI locationel decision. Thcrc is r reluivcly weak but somewhat positlvc rciatimhip bmvccn incentives and investment.... (But) it would bc wrong to u s m e thu incent~vcs o f f d by Swcs are irrelevant as a source of altwting FDI. When

bdmmtd dchmhnb 8crm Stlbg uc similar, incentives help the fm$n m ~ t m towsrds mrking a particular locadonal Mion. Rob Jenkins ~gues
mOfC

concessions to amct dinct in men^ md

furlher de-link their

MY,w t i 0 n m 0 n g f e d d units m

economic farm from one another, thus, contributing to the p t t m of

provincial Dwwinism." Jenkins qualifies this n c e to the k n m vim of

inta-state competition by observing that %ere have been some m o m to counter this trmd ...At a CII summit in J a n w 1995, West Benpl Chief Minim, Jyoti Bau, strongly anphaised the need to end the inter-Suite taxation war to woo invcston because it would ultimately bc of ' m z gain' to the States and mult in loss in r n ~ n u e . ~ ' By w l y 2001, Jyoti Basu'r views that h e provinces should avoid an inter-State competition seemed to be gaining ground. In
M

i n t m i m to the

Rudolphs, on Febnrary 4, 2000, P.V.Rajararnan,the Finance Sccretiuy to thc Government of Tamil Nadu, conceded that for over five years. Tamil Nadu and -hm made competitive o f f m with respect lo k h o l d lnnd and

i n h t r u c m bat caused serious financial loss. This race to thc bottom w u

bald by coopmti\e c f f m of the provinces to institute a common provincial

m.

Smtn' Finance Minincn, having got influenced by a speech by Raja

chclli& on the m d for tax reforms, joined t q a h c r to g the Cnion promote a

Y ~ w . 5 0 . ~ ~ .
" Jenlrinr. a

52,pp. 132-33.

a unifonn system of sales C x amon$ the states and t "do away with tax nm o incentive wan.*' By January 2000, implementation had progressed in most

of the States, including Union Territories like Pondicherry. By February 2001, State Finance M i e had agreed that on April 1, 2002, the States would isr nts adopt a unifonn CENVAT (Central Value Added Tax) as the country's principal excise tax. If incentives and State salts tax competition m a t e a prisoner's dilemma situation, communication and learning can lead to cooperation rather than defection. This seems to be what has been happening to moderate, if not eliminate, the race to the b~ttom.'~
As a result of this, the States now better concentrate on developing the

inhtrucnue rather than on g~antingconcessions to the foreign investon which in a way leads to loss of revenue. Thus offering incentives and concessions have now decreased in significance as a strategy of foreign economic policy.

Restraints on State Autonomy

As we have noted earlier in the beginning of this chapter, the Union Government's hazardous furancial conditibn6' obliged it to curtail centralised

''Rudolph and Rudolph, n. 14, p. 1551.

h early 2000, the Union's fiscal deficit w hovering at 5.6 per cmt despite persistent efforts t bring it down to 4 per cmt. Intmst payment on deficit had risen o ahningly to 50 per cent of the centnl revenue, The Hindu, Much 14,2000.
@

planning a public ~nvesancnf6' d which led to increased autonomy for State

Gov-0

in the nalm of amacting foreign capital to their respective

States. This, however, did not mean the Union vanishing from the scene altogether. No doubt, it has become less potent to intervene through its control of public investment, prrmits and licenses. At the same time, however, there
has bem a considerable increase in its regulatory role. Through a variety of

means, it has come to paform this role and limit the autonomy of the States in the realm of foreign economic policy. One of the important means through which the Union Government has tried to restrict the provincial autonomy in this field is its Constitutional authority. The Constirution of India warrants States to solicit and receive Union Government's permission for all foreign borrowings. Article 293 (1) of the Constitution resmcrs State borrowing to domestic lenders. It says, "The executive powers of a State shall extend to borrowing within the territory of India upon the security of the Consolidated Fund of the State." Equally decisive for the Union Government's enforcement for fiscal discipline is Article 293(3), which requires States to owe money to the Union to obtain its consent to borrow. It sdpulates, "A State may not without the consent of the
Finding itself somewhat marginalised in the decision-making process of the Union Oovcmmmt, the Planning Commission, in a confidential intemal note, urged the m n that it be given a much larger co-ordinating role in the f e d 4 system. "In the t domestic sector, the Commission feels that it should be allowed to play the role of an arbitrator whmever then is 'lack of hannonisation' of policy betwan various tiers of Oowmmmt and a h ktwem regions in the country." It seem clear that the Commission was Pryiag m carve out a new regulatory role for itself in the federal economy, Thc Hit&, April ll.2000.
6'

O o v ~ ~ ~of India nise any loan if thae is still outstanding any part of a ent loan, which
been made to the State by the Govanmmt of India!'

Since all

States owe money to the Government of India, the condition applies to all
States.

The Government of India can pass defining legislation f o a rm constitutionally enumerated list of Concurrent Subjects on which both the Union and the States may legislate.62 One such subject, for example, is electricity. The Union-initiated Electricity Act 2000 places the Central Electricity Authority and newly established Union and State Electricity Regulatory Authorities in the dominant position with respect to State electricity management and planning. In recent years, the Union has increasingly asked the States to accept conditionalities in return for permissions. The Union Government wields significant influence over the lending institutions. Despite the demise of the 'pennit-license raj,' it still reviews large foreign investment proposals. World Bank loans to State Governments involve intensive negotiations between individual States and the Bank, but because they are foreign loans, they have to be processed and cleared by the Union Government. Also, the World Bank lending instruments specify the Government of India, and not that of the State, as the official borrower. This places the Union Government in a position of great leverage. The Govcmment

" The CoWttufionoflnda, List III, Concumnt List, Itmq 38.

200

of India uses its disaetion i deciding what provisions will be allowable. Also, n the Union, in return for additions to its foreign exchange balances, lowers the

interest rate States pay and absorbs the risk of variable foreign exchange
mtes."

Even the foreign trips of the Chief Miisten need to be cleared by the Union. The recent controversy s m u n d i i g the visit of Ashok Gehlot, the Rajasthan Chief Minister, to the USA is a case in point. The Union is not alone in putting up constraints on the States. Apart from it, the States have to deal with the faceless and apolitical credit-rating agencies, which from time to time make known their rankings of various States in terms of their capacities to borrow at a reasonable rate of interest to

be paid. Foreign private investors make their investment and interest rate
decisions in the light of credit ratings by international raters such as Standard and ~ o o r ' s . ~ Apart from the Union and international credit rating agencies, States are also exposed to the discipline of international lenders such as the World Bank and the Asian Development Bank. Chandrababu Naidu was the f h t one to negotiate a State-level World Bank development loan. 'hereafter, several

63

Rob Jenkins, "India's Staw and the Making of Foreign Economic Policy: The L i t s of the Constituent Diplomacy Paradigm," Paper presented at a Confirence on 'Tronrfonning a Fedsrrrrion, ' University of Pmnsylvania Cmtn for the Advaaced Study of India, India International Cenee, New Delhi, 16-19 February 2003, p. 12.
Rarings by the International rating agencies arc regularly carried in Indian

N e w .

ptovinccs have followed the suit. The Sbteg need to danomtratc their creditwmthhes8 to the World Bank, the Asian Development Bank and such other

international lenders. They closely monitor the progress in the implementation of the various projects and programmes that they assist. They also assess the economic reforms process in the States to ensure compliance with their guidelines and conditionalities. That is why, the Andhra Govmunent rolled out the proverbial red carpet when the World Bank Presidenf James D. Wolfmsohn, visited the State in November 2000.The visit was a part of the Bank's review mission to Lndia as a whole."

On the whole, however, the New Economic Policy that heralded the
liberalization era in the Indian economy by doing away with the control and command, permit-licence raj model of economy has given rise to what has come to be called a "federal market economy." The end of the era of the "single dominant party system", which gave way to a multy-parry coalition system in which the regional parties have come to play defining roles, has also contributed in this process. In case of Andhra Pradesh, it has been apparent several times. The Telugu Desam Party, under Chandrababu Naidu, provided vital support so necessary for the survival of the National Democratic Alliance Government, headed by Atal Behari Vajpayee at the Union level. This gave Naidu considerable leverage at New Delhi and whenever the federal

" 8.South AdaBabu, "Glocalisation and India's ForeignPublishers, 2003),p.49. Jha, Ramesh Policy," in Nalini Kent ed., in 21"Cenhoy (New Delhi: South Asian

bureau*acy objected to any provision of the World

Bank loans for Andhra,

more o h than not, Naidu exated decisive pressure on the f e d 4 political

bosses to rein the officials habb trend is likely to continue under the new The Congress-led coalition Government which also vitally depends upon the support of regional parties. To sum up, the States have come to enjoy more financial autonomy in international sphere. Inter-State competition to woo foreign investors has increased. This has resulted in a race to the top and a race to the bottom. Of late, the States seem to be coming closer in realizing the futility of the race to the bottom. While the Union Government, international credit rating agencies and international lenders regulate provincial autonomy in the field of international economy, they have undoubtedly come to play a significant role

in the realm of foreign economic policy making in this era of globalization,

liberalization and coalition politics.