State-business relations and economic performance in India

F rom independence and till the early 1990s, the Indian economy was characterised by a command and control regime, whereby the state essentially shaped the investment decisions of the private sector and the public sector occupied the 'commanding heights' of the economy. Most commentators are of the view that such a dirigiste regime led to a collusive and rent-seeking relationship between the state and the private sector, and that this had significant negative impacts on economic performance. There were signs even in the early 1980s that the attitude of the Indian state towards the private sector was changing. In 1991, the Indian economy underwent major economic reforms, and the command and control regime was dismantled. Along with this, there was a clear shift in the Indian state away from a hostile relationship with the business sector, towards a closer and more collaborative relationship with private capital. However, given India's federal structure and the significant political autonomy and independence in legislative powers enjoyed by state governments, the evolution of state-business relations (SBRs) has not been the same across Indian states, with more collaborative relationships forming in some states and not in others. Has this change in the nature of SBRs in Indian states, from a collusive to a more collaborative relationship, had any impact on economic growth? Strikingly, although economic growth in India has been strong since the mid-1980s, not all regions in India have benefited equally from the improvement in overall economic performance. States like Andhra Pradesh, Gujarat, Karnataka, Kerala and Tamil Nadu have grown at a rate of per capita income that has exceeded 4.5% per annum during the period. On the other hand, states such as Assam, Bihar and Madhya Pradesh have grown at around 2% or less in the same period. These variations in economic growth across states in India have been strongly correlated with poverty declines in India, with high and persistent rates of poverty in states such as Assam and Bihar as compared with Andhra Pradesh and Gujarat. Improving Institutions for Pro-Poor Growth (IPPG) research has shown that variations in regional institutional quality captured by the quality or effectiveness of SBRs can explain variations in economic growth in Indian states. Cali et al. (2009) measure the nature of SBRs in India across states and over the period 1975-2004. They find that this measure shows an unambiguous improvement in the functioning of SBRs across most Indian …