ABSTRACT
This chapter is divided into four main parts, the first of which outlines India’s episode of growth between 1979/80 and 1991, then reviews and critiques the existing explanations for this growth. Each of the remaining three parts of the chapter focuses on one particular role that the state has in promoting economic development. The first two examine the potential economic (finance and production) roles of the state and the third the potential political role of the state (institutions). The Indian state between 1979/80 and 1991 had three principal roleswith regard to the domestic financial system.Theseweremobilising domestic savings, creating institutions to mobilise private-sector savings, and allocating resources to projects essential for development. The state managed to maintain a steady if slow rate of growth in aggregate savings and tax revenue. Rapid growth in current expenditure undermined these efforts and public sector savings fell sharply. Private corporate-sector savings grew marginally during the 1980s but household savings increased rapidly, particularly the financial component. The second important financial role of the state was in allocating resources to projects essential for development. There was a sharp increase in public investment in the early 1980s. The crucial role of the state in production is ensuring that the surplus is used productively, to either raise productivity in an existingmarket niche (learning) or upgrade to higher technology production. There was a sharp increase in productivity growth after 1979/80. There are four reasons why productivity growth increased in the 1980s: higher levels of public investment; an increase in productive private investment; the existence of a large amount of slack in capacity; and a pattern of extensive growth. Productivity growth was a somewhat haphazard process of extensive growth with few signs of learning. Despite big election victories in 1980 and 1984, this was not a restoration of the old Congress system. The Party organisation had decayed and the authority and ability of Congress to mediate in local affairs had declined sharply. There emerged an institutional vacuum in the periphery. Intense and undisciplined factionalism led to a difficulty in retaining power, a resort to populism and to conflict shifting to street violence. Congress was unable to diffuse political tensions by negotiation and incorporation of the local-level leadership. In the 1950s higher public investment
strict associated with a small rise in tax revenue, sharper increases in government current expenditure and subsidies, a massive increase in the government fiscal deficit and a sharp decline in public sector savings. The state in the 1980s did not have the institutions necessary to mobilise the necessary resources to pay for expansion and allocate the resulting burden. The explosion of rent seeking that had occurred after the mid-1960s (Chapter 6) continued unabated. The state possessed no institution for identifying those requiring compensation, minimising the transaction costs associated with such transfers, and minimising rent seeking by other entities. Rent seeking and the growth of unproductive rents continued unabated and indiscriminately. Political mobilisation in agriculture generated a massive growth in subsidies (rents). Subsidies increased across the board in numerous economic sectors, reaching 15 per cent of GDP in 1987/88. Strike activity reached new peaks in the 1980s andwas quickly followed by risingwages. Finally, this section concludes with evidence showing that the pattern of resource mobilisation in the 1980s was not sustainable.
