Economic Liberalization, Electoral Coalitions and Private Investment in India

Kanta Murali∗

Politics of FDI Conference, Niehaus Center for Globalization and Governance, September 23-24, 2011

∗ Ph.D. Candidate, Politics Department, Princeton University, Princeton, NJ 08544; kmurali@princeton.edu For their comments and suggestions, I thank Atul Kohli, Evan Lieberman, Grigore Pop-Eleches, Amaney Jamal, Noam Lupu and Dinsha Mistree. All errors and omissions are my own. This paper draws on chapters 1, 2 and 3 of my dissertation.

Terminology and a list of abbreviations

Adivasis Scheduled Tribes; also referred to as STs

AP Andhra Pradesh

BJP Bharatiya Janata Party

CPI Communist Party of India

CPI (M) Communist Party of India –Marxist

Dalits Scheduled Castes; also referred to as SCs or Harijans

FDI Foreign Direct Investment

FPTP First-Past-the-Post

INC Indian National Congress

IPE International Political Economy

KHAM Kshatriya Harijan Adivasi Muslim

MLA Member of the Legislative Assembly

OBC Other Backward Castes

PRP Praja Rajyam Party

NTR N.T. Rama Rao

SAD Shiromani Akali Dal

SC Scheduled Castes; also referred to as Dalits

ST Scheduled Tribes; also referred to as Adivasis

TDP Telugu Desam Party

TRS Telangana Rashtra Samiti

UP Uttar Pradesh

YSR Y.S. Rajasekhar Reddy

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1. Introduction: motivation and questions

Cases of rapid growth in the developing world are rare. If examples of high growth in poor

countries are few and far between, rarer still are those that have occurred in a democratic setting.

From the point of view of an extensive literature on redistribution, these trends are not

surprising. Starting with the classic models of Romer (1975) and Meltzer and Richard (1981),

scholars have posited an inverse relationship between income and individual preferences for

redistribution – individuals with lower incomes are likely to favor greater redistribution. While

recent theories have emphasized other variables in explaining redistributive preferences such as

structure of inequality, skill types, prospects for mobility, risk aversion, values and beliefs, even

those that highlight alternative mechanisms empirically confirm an inverse relationship between

income and preferences for redistribution (e.g., Alesina and Angeletos 2005; Alesina and Ferrara

2005; Iversen and Soskice 2001).

A related set of studies link democracies to redistributive outcomes at a macro-level (e.g.,

Acemoglu and Robinson 2005; Boix 2003). Though these authors focus on the conditions under

which democracies emerge and consolidate, they too assume that the poor prefer higher

redistribution than the rich. Authoritarianism privileges elite interests while democracies are

responsive to the poor and, as a result, should redistribute more. Some authors also broadly

suggest that democracies are better for the welfare of the poor as they provide more social

spending or public goods than non-democracies (e.g., Brown and Hunter 1999; Kaufman and

Segura-Ubiergo 2001; Lake and Baum 2001; Stasavage 2005).1

If the poor generally prefer redistribution and democracies have a proclivity to redistribute,

we should see poor democracies focusing predominantly on redistribution. Given the nature of

resource constraints in developing democracies, policymakers often face a trade-off between

growth-related and redistributive policies.2 It is therefore unlikely that growth will occur in such

circumstances. Yet as a largely poor and highly-competitive democracy that has witnessed a

notable growth transformation, India poses a puzzle to this hypothesis. Over the last two 1 Ross (2006) challenges the claim that democracies have a better record on the welfare of the poor. In addition, levels of redistribution vary within democracies (e.g., Iversen and Soskice 2006, 2009). 2 As discussed in the conclusion of this paper, there are several reasons why a trade-off between growth-related goals and redistribution may exist in developing countries. The extent to which there is a trade-off is ultimately an empirical question. In Indian states, there is considerable evidence of the tension between growth-oriented and redistributive goals after market reforms.

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decades, India has been among the world’s fastest growing economies. Between 1991-92, when

it adopted extensive market reforms, and 2009-10, India’s average annual GDP growth rate was

an impressive 6.5 per cent.3 This stands in stark contrast to the experience of other successful

late developers. Not only did well-established democratic politics precede India’s shift to a high-

growth path, economic change has taken place in a polity where the poor constitute a near

majority of the electorate and are more likely to participate in the electoral process than

economically-privileged sections (Yadav 1999, 2002). 4

The puzzle posed by India’s experience – of rapid growth in the midst of a largely poor

electorate – leads to a broader question that forms the main motivation of my dissertation, on

which this paper is based. What are the political conditions conducive to high growth in poor

democracies? Through a subnational analysis of India’s economic transformation, this paper

argues that under certain circumstances in poor democracies, redistributive pressures are more

contained and policymakers can prioritize growth-related concerns. The core argument focuses

on the nature of the social base of voters backing governments, which I refer to as electoral

coalitions.5 Some configurations of electoral coalitions are more favorable to growth-related

issues than others. Specifically, narrow-right coalitions, characterized by the joint presence of

core groups with similar economically-advanced profiles and substantial representation of

business interests, are most conducive to growth-friendly policies.

How do narrow-right coalitions emerge in the presence of poor electorates? When identity

politics forms the main mode of political mobilization, underlying social cleavage patterns

influence the choice of groups that parties seek to target in constructing electoral bases of

support. In such cases, I find that certain cleavage structures can affect party strategies in a way

that allows growth-friendly coalitions to emerge in the midst of poor electorates. These coalitions

3Calculations based on GDP data from RBI (2010). 4 Poverty measures are highly controversial in India. The World Bank’s estimates suggest that 41.6 per cent of India’s population lived below the $1.25 a day poverty line in 2005 and 75.6 per cent lived below $2 per day. Official estimates of the Indian government peg the poverty headcount ratio at 37.2 per cent in 2004-05 (Tendulkar Report). This translates to 301.7 million people below the poverty line. Another government-appointed taskforce using a different methodology, the Saxena Committee, estimated the poverty ratio at 50 per cent in its report while a third, the Sengupta Committee, put the figure of “poor and vulnerable” at 77 per cent of India’s population or 836 million people. 5 Throughout this paper, electoral coalitions refer to the base of voters who support a particular government and not to a coalition of parties in government. However, governments comprising a coalition of parties have frequently come to power in India in the last two decades. In such cases, the vote base of all parties that comprise the government is taken into account.

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are unlikely to occur in developing country contexts if economic interests form the sole basis of

mobilization.

The argument is developed in relation to a particular empirical puzzle that examines variation

in one of the key inputs of growth – investment – across Indian states after market reforms.6 A

focus on investment in subnational units in India is particularly suitable for an analysis of

political conditions favorable to growth. Starting with neoclassical growth theory, models have

highlighted the importance of investment in the growth process. While there are multiple sources

of growth and other explanatory factors have also been emphasized, a positive empirical

relationship between investment rates and growth is widely accepted (e.g., Barro and Sala-i-

Martin 2004). The subnational units analyzed in the larger dissertation project have primary

responsibility for most policy areas related to investment promotion and are subject to a similar

constitutional, financial and electoral structure. Critically, this allows the study to control for

several potentially confounding institutional factors and focus closely on political conditions

favorable to growth-related concerns.

Specifically, this paper examines the markedly different performances of subnational

governments in the competition for private industrial investment in India, which began after the

adoption of market reforms in 1991.7 Despite being subject to a similar institutional framework,

some states have attracted considerably higher levels of investment than others. In turn, several

scholars point out that these varied patterns of investment can be traced to both initial socio-

economic conditions as well as state agency – policies and measures undertaken by governments

(Ahluwalia 2000; Besley et al. 2007; Kohli 2006; Subramanian 2008). Focusing on state

activism in the context of subnational competition for investment in India after 1991, this paper

addresses the following questions. What role have subnational governments played in attracting

private investment to their jurisdictions? Why have some Indian states been more successful in

attracting investment than others?

6 The term state is used in two contexts in this paper. The first refers to the political and bureaucratic institutions of government. The second, used in this sentence, refers to the tier of government below the federal level in India. In the latter context, the terms state, regional and subnational are used interchangeably. 7 Investment throughout this paper is meant to refer to private industrial investment – domestic and foreign direct investment by the corporate sector. It does not include portfolio investment or investment in agriculture, except for agro-based or agro-processing industry.

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Neither socio-economic determinants of investment location emphasized by neoclassical

economics and its variants nor several political variables highlighted by cross-national studies of

foreign direct investment can adequately explain regional patterns of investment observed in

India. At a more general level of analysis, factors emphasized by political economy explanations

of growth and policy-making such as colonial inheritance, partisan preferences and ideology,

political competition, ethnic diversity and leadership offer additional hypotheses. However, as

section 6 outlines in more detail, even these theories have limited salience in explaining patterns

of investment observed across Indian states.

In contrast, this paper suggests that, at a proximate level, subnational patterns observed in

India after 1991 can be explained by the varying nature of state agency in investment promotion.

Some subnational governments have been more pro-active and aggressive in attempting to attract

private investment. As a result, both the speed and scope of policies have differed, contrary to

expectations of the convergence hypothesis that posits that units competing for mobile capital

should adopt similar capital-friendly policies (e.g., Andrews 1994; Cerny 1993). A deeper

question automatically follows from this variation. Why have some states been more pro-active

and business-friendly than others? I argue that state activism in relation to investment promotion

is dependent on the nature of electoral coalitions backing governments. In particular, the class

profile of voters who comprise electoral coalitions crucially affects both how investor-friendly

states can be in formulating policy as well as how efficient they are in implementing these

policies. The policy framework, in turn, affects decisions of individual investors and

subsequently aggregate investment outcomes. Figure 1 provides a schematic representation of

the argument.

[Figure 1 here]

Typically, policymakers in units competing for mobile capital face two sets of incentives –

pressures to undertake business-friendly policies and demands arising from the electorate that are

often more redistributive. In developing countries such as India, where decisions involve the use

of limited resources or growth has not been inclusive, the two sets of pressures tend to be at odds

with one another. Electoral coalitions, in turn, determine what goals governments prioritize and

how they balance multiple aims in the context of limited resources. Coalitions are conceptualized

as four types – narrow-right, narrow-left, wide-right and wide-left. I argue that states that have

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been more pro-active and investor-friendly are backed by narrow-right electoral coalitions. Core

groups of voters in this type of electoral alliance share a similar economically-advanced profile

and business groups are also substantially incorporated in the coalition. The joint presence of

these factors has two consequences. The redistributive pressures exerted by narrow-right

coalitions are more muted than those arising from other coalitions. Second, there are fewer

contradictory incentives for policymakers backed by narrow-right coalitions. As a result, they

can formulate and implement investor-friendly policies in a more consistent and coherent

fashion.

Narrow-left, wide-right and wide-left coalitions stand in contrast to narrow-right ones.

Narrow-left coalitions consist of similarly placed poor groups and there is minimal incorporation

of business interests. The key demands of this coalition are primarily redistributive and there are

considerable challenges to formulating and implementing an investor-friendly agenda. While

wide-left coalitions are similar to narrow-left ones in that business representation is small, the

socio-economic profile of core groups in this coalition is more mixed – some groups are poor,

others are better off. Inasmuch as middle or high income groups are included, this coalition is not

solely focused on redistribution and is more investor-friendly than narrow-left ones. Wide-right

coalitions incorporate business in a more substantial fashion but, unlike narrow-right ones, also

include other groups drawn from more diverse points in the socio-economic spectrum. As a

result, economic interests of wide-right coalitions are more varied and their demands tend to pull

politicians in multiple directions. Thus, governments backed by wide-right coalitions cannot

formulate and implement as coherent and consistent a pro-business agenda as narrow-right

coalitions can but they are typically much more investor-friendly than either narrow-left or wide-

left ones.

To explain the origins of narrow-right coalitions, my dissertation provides an explanation

that highlights the role of identity politics. For a variety of reasons such as the existence of well-

established social arrangements or the presence of low information environments, identity

politics often acts as the primary mode of political mobilization in poor democracies. In such

cases, certain pre-existing cleavage patterns influence party strategies of coalition construction in

a way that allows narrow-right coalitions to emerge.

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I trace the emergence of specific types of electoral coalitions in Indian states to diverse social

environments and emphasize the key role of caste as the dominant mode of political mobilization

and participation. As a ranked ethnic system, caste is also linked to economic status and caste

groups tend to be largely bound within particular economic classes. Focusing on the dimensions

of numerical size and resource control, my explanation categorizes underlying caste structures

across Indian states into four patterns. These variations influence the nature of political

competition in different ways. In particular, these differences affect the choice of groups that

parties mobilize across states. As a result, particular types of electoral coalitions are more likely

to emerge under certain pre-existing caste configurations. Specifically, the overlap between

numerical strength and entrepreneurial identity inherent in “dominant caste” patterns allows

parties to win electoral majorities with narrow-right coalitions. Other cleavage structures that are

characterized by the presence of numerous small groups make wide coalitions more likely.

The ability of narrow-right coalitions to succeed electorally is aided by the fact that large

groups enjoy significant leverage in India’s first-past-the-post system and parties can rely

disproportionately on such sections. The dependence on specific social vote banks has been

particularly evident over the last three decades with increasing competition and declining

thresholds for electoral success at the subnational level. At the state level in India, parties

routinely form governments with vote shares much lower than 50 per cent.

Though my explanation for the emergence of electoral coalitions begins with a focus on pre-

existing cleavage structures, it emphasizes that coalition formation is not a static process.

Cleavage structures influence party strategies but the latter, in turn, have a feedback effect on

subsequent decisions related to political mobilization. To reflect its dynamic and sequential

nature, I chronologically trace the process of coalition formation in the case studies. In doing so,

I highlight the impact of both cleavage structure and political agency.

In the larger dissertation project, I first draw on evidence from in-depth case studies of four

Indian states – Gujarat, Punjab, Andhra Pradesh (AP) and Bihar – which are treated as “model-

building” cases (Lieberman 2005). I then test the applicability of the core argument on a broader

group of 17 Indian states. In this paper, I provide empirical evidence from two of the four model-

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building cases – Gujarat and Punjab.8 Socio-economic conditions in these two rich states were

relatively similar at the start of the economic liberalization process in 1991 but their performance

in the competition for investment has diverged considerably. Gujarat has, arguably, been the

most pro-active state in India in the competition for investment while Punjab has been largely

apathetic, despite possessing sound infrastructure and an established industrial base. My

explanation suggests that narrow-right coalitions in Gujarat, which have backed successive

governments since 1990, have allowed the state to prioritize an investor-friendly agenda. In

contrast, Punjab governments have been pulled in different directions by wide-right coalitions. In

response to diverse pressures arising from wide-right coalitions, successive Punjab governments

have resorted to populism. Vicious cycles of competitive populism over the last two decades

have led to a severe drain of the exchequer and the state simply does not have the finances to

create a business-friendly investment climate.

This paper traces narrow-right coalitions in Gujarat and wide-right coalitions in Punjab to

varying cleavage patterns present in the two states. The overlap between numerical and

economic strength of certain groups embodied in Gujarat’s dominant caste structure has allowed

the BJP to build winning coalitions around economically-advanced sections. In comparison,

most social groups, including entrepreneurial ones, are small in Punjab. As a result, parties have

had to rely on a more diverse set of groups to win elections and wide-right coalitions have been

the norm in the state. In addition to these states, my dissertation includes two more in-depth case

studies of Andhra Pradesh and Bihar (not discussed in this paper). The policy commitments of

these two states have fluctuated over time and I argue that these temporal changes are explained

by shifts in the type of electoral coalitions backing governments. The types of coalitions, in turn,

arise due to the specific nature of social cleavages in these states.

This paper contributes to four strands of scholarly work. By highlighting political conditions

conducive to investment in the presence of poor electorates, it has implications for studies on the

politics of growth and policy-making in developing countries. The argument points to a factor –

electoral bases of support – which has been largely ignored by existing theories of investment

location. By focusing on state agency in poor democracies, the paper also contributes to the

developmental state literature. Finally, this paper joins a growing set of subnational studies on

8 Chapter 4 of my dissertation includes in-depth cases of Andhra Pradesh and Bihar and is available on request.

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India, which highlight the impact of diverse social and political environments across states in

explaining varied policy outcomes within the country.

The rest of this paper is laid out as follows. The next section outlines the empirical puzzle in

more detail, placing it within the larger context of market reforms in India as well as existing

explanations of investment location. Section 3 briefly describes the research design and method

of case selection. Section 4 spells out the argument in more detail. Section 5 includes the

empirical evidence for the argument, first briefly outlining the nature of policy variation across

states and then tracing the argument through two case studies. Studies in the political economy

literature on growth and policy-making offer additional hypotheses and I evaluate my argument

against these explanations in section 6. Section 7 concludes.

2. The empirical puzzle

2.1. The background: market reforms and subnational competition for investment in

India

In response to a balance of payments crisis in the summer of 1991, India embarked on a path

of extensive market reforms. Socialist planning, an inward orientation and an interventionist state

gave way to a more external outlook and decentralized structure that involved a very different

role for the market and the state. The centerpiece of India’s post-independence policy regime –

the industrial licensing system – was virtually eliminated, drastically reducing state control of the

private sector. Private investment supplanted public investment as the main engine of growth and

this in turn had major consequences for the nature and content of policy-making in the country

(e.g., Ahluwalia 2000; Jenkins 1999; Kohli 2004, 2006; Rudolph and Rudolph 2001; Singh and

Srinivasan 2006; Sinha 2005). India also changed its external sector strategy considerably, easing

regulations on foreign investment and gradually liberalizing its trade regime.

The process of economic liberalization had critical political and economic consequences.

One major shift has been in the nature of economic policy-making and the role of the center and

state governments in this process. Prior to 1991, New Delhi enjoyed dominant control of

economic policy but the onset of reforms led to a sharp decentralization of economic decision-

making and brought state governments to the forefront of policy-making. The virtual elimination

of the licensing system in 1991 meant that private investment was no longer subject to

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geographical constraints by the federal government. This resulted in states competing with each

other to attract domestic and foreign private investment to their jurisdictions. According to

Rudolph and Rudolph, “by the end of the 1990s, state chief ministers became the marquee

players in India’s federal market economy. What has attracted media and policy attention in

recent years is the competition among the states for international attention and for domestic and

foreign private investment” (2001: 1541).

At the same time, growing subnational economic authority was politically reinforced by

parallel transformations occurring in India’s vibrant democracy.9 The decline of the Congress,

the onset of coalition governments at the center, the marked regionalization of Indian politics and

major surges in the participation of lower castes in the populous north – processes that had their

origins in the 1960s but reached their peak in the early 1990s – all led to a vastly different

environment where states began to enjoy new-found political leverage. In short, the era of

reforms has seen a discernible shift in the locus of economic and political power from New Delhi

to the states.

Despite this downward shift of economic and political power, there are considerable

differences in the way subnational governments have reacted over the last three decades. In

contrast to the infamous “Hindu rate of growth” of 3.2 per cent between 1965-66 and 1980-81,

India grew at 6.5 per cent between 1991-92 and 2009-10. These robust national growth rates,

however, have been accompanied by considerable regional differences. In turn, several studies

suggest that the proximate cause of regional growth differentials after 1991 is diverging private

investment levels across states (e.g., Ahluwalia 2000; Besley et al. 2007; Kohli 2006;

Subramanian 2008). As the next section will show in more detail, there has been considerable

divergence in investment patterns across Indian states in the post-1991 period.

Studies in the Indian political economy literature cited above suggest that varying actions of

subnational governments as well as differing initial conditions play a key role in explaining

investment performance. Contrary to some expectations, the state continues to play a critical and

9 By the provisions of the Indian constitution, state governments have jurisdiction in the area of industries, except those declared by parliament to be necessary for defense purposes or expedient to public interest. States also have significant responsibility in most policy areas relevant to investment promotion such as land, electricity, roads (excluding national highways), labor laws, certain taxes, special economic zones and law and order. However, the presence of the industrial licensing system until 1991 allowed the center to control the location of investment.

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active role in the economic sphere in India, though the nature of its tasks has changed after

economic liberalization.10 However, state agency varies regionally – some subnational

governments appear to be more pro-active and have greater capacity to achieve development

outcomes than others (e.g., Besley et al. 2007; Kohli 2006; Rudolph and Rudolph 2001;

Subramanian 2008). Contrasting the growth experiences of Bihar and Gujarat, Kohli suggests:

“A variety of Bihar’s initial conditions, including the investment climate, are clearly part of this

story. However, it is also the case that repeated governments in Bihar have simply not been

developmental…The absence of state activism for development is costing Bihar dearly” (2006:

1367). This paper thus focuses on the question of state activism in the competition for private

investment and attempts to understand why some states have performed better than others since

1991.

The next section first lays out the nature of variation in investment across Indian states and

then shows that existing theories do not explain these patterns adequately.

2.2. The puzzle of spatial and temporal variation in investment patterns

Table 1 and figure 2 demonstrate the variation in investment patterns across Indian states in

the 1991 to 2010 period while figure 3 demonstrates temporal variation within select states.11

Gujarat and Maharashtra, which have just over 14 per cent of India’s population, received almost

31 per cent of the total number of investment projects and 21.4 per cent of the total value of

investment in the country between 1991 and 2010. To put it in more stark terms, the per capita

investment received by Gujarat between 1991 and 2010 is more than 15 times that received by

Bihar, India’s poorest state, and more than 40 times that received by Kerala, a state much-feted

for its various human development achievements. These spatial patterns also transcend a simple

rich vs. poor state divide. There is variation within groups of high income (based on per capita

levels) states as well as low income states.

[Table 1, Figures 2 and 3 here] 10 Chapter 2 of my dissertation compares measures and policies across states. 11 These are calculations of proposed investment based on data from the Secretariat of Industrial Assistance (Ministry of Commerce and Industry, Government of India). To start a business, investors must file an industrial entrepreneur’s memorandum (IEM) or letter of intent (LOI) giving details on the proposed project. In a few sectors, such as coal and other minerals, investors are still required to obtain licenses. Until recently, investment data was collected by the government at the time that the IEMs or LOIs were filed. This data does not contain details of actual implementation.

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Theories that stress socio-economic determinants in explaining investment location do

account for some variation in investment seen across Indian states but do not provide a complete

explanation. Neoclassical growth theories such as the Solow model suggest that economies with

lower capital per worker tend to have higher rates of return. As a result, capital is expected to

flow from capital-rich to capital-scarce areas (e.g., Barro and Sala-i-Martin 2004). Empirical

challenges to this view led scholars to include additional factors such as human capital to

standard neoclassical models as well as variables such as political instability, regime type,

property rights and constitutional checks and balances (e.g., Alesina and Perotti 1996; Barro

1991, 1996, 1997; Lucas 1990; Stasavage 2002). Away from neoclassical theories, the economic

geography literature suggests that there are a set of centripetal factors that encourage spatial

concentration of economic activity and firm location such as market size, thick labor markets and

information spillovers but also a set of centrifugal forces such as land, natural resources and

pollution that discourage agglomeration (Krugman 1991, 1998).

The theories mentioned above typically highlight variables such as level of economic

development, market size, infrastructure and human capital as factors that affect investment

location. Figure 4 plots actual values of cumulative investment from 1991-2008 against values of

investment that are predicted by initial socio-economic conditions in 1991, specifically per capita

income (as a proxy for level of economic development), state domestic product (as a proxy for

market size), literacy (as a proxy for human capital) and road density (as a proxy for

infrastructure). As figure 4 shows, socio-economic factors do not provide a complete

explanation – several states lie above and below the line.

[Figure 4 here]

The international political economy (IPE) literature on foreign direct investment stresses

both political factors as well as socio-economic determinants. Political variables highlighted in

the IPE literature include regime type (e.g., Jensen 2003, 2006; Feng 2001), various types of

political institutions (e.g., Henisz 2000, 2002; Knack and Keefer 1995; Stasavage 2002), political

uncertainty (e.g., Brunetti et al. 1998) and participation in international trade agreements and

preferential trade agreements (e.g., Büthe and Milner 2008). Investment patterns observed across

Indian states pose a puzzle even for these theories. Most of the political variables that are

emphasized in the IPE literature are applicable only in a cross-national context. The Indian states

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included in the larger dissertation project are subject to the same legal, electoral and financial

framework. The subnational research design used automatically controls for several political and

institutional factors such as regime type, property rights, participation in trade agreements,

electoral rules and formal constitutional checks and balances. As such it is not clear what type of

institutions and what sources of political instability affect investment in a subnational context.

The larger project aims to explore these factors.

At a more general level of analysis, explanations of growth and policy-making focusing

on factors such as colonial inheritance, partisan preferences and ideology, political competition,

ethnic diversity and leadership are also relevant to study of investment. These theories are

insufficient in explaining patterns observed, as section 7 demonstrates.

3. Research Design

As existing explanations are insufficient in accounting for subnational patterns observed, my

dissertation first draws on evidence from in-depth case studies of four Indian states – Gujarat,

Punjab, Andhra Pradesh (AP) and Bihar – which are treated as “model-building” cases

(Lieberman 2005). The applicability of the argument is then tested on a broader group of 17

Indian states. This paper includes abridged versions of two of the four main case studies –

Gujarat and Punjab.

The model-building cases were selected on the basis of the procedure suggested in

Lieberman (2005). A considerable portion of the literature on the spatial determinants of private

investment focuses on socio-economic variables such as market size, level of economic

development and human development. A simple cross-section OLS regression was first run

using investment data and initial socio-economic conditions. More specifically, cumulative

investment from 1991 to 2008 was regressed on proxies of four socio-economic variables (level

of economic development, market size, human capital and infrastructure in 1991). Figure 4 plots

actual investment values against those predicted by these socio-economic factors. Employing an

“off- the-line” strategy, four states – Gujarat, Andhra Pradesh (AP), Punjab and Bihar – that are

not well predicted were chosen. Socio-economic variables would have predicted similar levels of

investment in Gujarat, AP and Punjab but the actual outcomes in these states vary considerably

from predicted ones, making the comparison a potentially interesting one.

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[Figure 4 here]

4. The argument

The core argument of my dissertation suggests that certain configurations of electoral

coalitions are more conducive to the formulation and implementation of an investor-friendly

agenda than others. In particular, narrow-right electoral coalitions, characterized by the joint

presence of similar economically-advanced core groups as well as substantial representation of

business, are most likely to support an environment favorable to capital.

4.1. Conceptualizing electoral coalitions

The central argument focuses on the class base of core voters backing governments. By

core voters, I refer to those who have a strong preference for a particular party and on whom the

party depends significantly for its support. In advanced democracies, the grounds for such

attachment are typically partisan or programmatic. In developing democracies, other

considerations such as identity often form the basis for such predisposition to a particular party.

Coalitions are categorized based on two dimensions – first, the similarity of socio-

economic profiles of core groups and second, the extent of business incorporation. Core groups

can range from poor to economically-advanced and the first dimension tries to capture the extent

to which these sections are similar in terms of their socio-economic standing. In other words, it

looks at whether class bases of core voters are confined or diverse. The second dimension

focuses on the level of business representation in coalitions, which can range from minimal to

substantial. The category of business is assumed to include capitalists controlling large-scale

industry as well as small entrepreneurs. Using these two factors, electoral coalitions can be

classified into four ideal types – narrow-right, narrow-left, wide-left and wide-right. The

classification can be represented as a 2 x 2 (figure 5). The core groups of narrow-right coalitions

share a comparable economically-advanced profile. Such coalitions also incorporate business

interests substantially. Narrow-left coalitions consist of similarly placed poor groups and there is

minimal incorporation of business interests. Finally, both types of wide coalitions consist of

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mixture of poor and wealthy groups. However, business incorporation in wide-left coalitions is

minimal while it is more significant in wide-right ones.

[Figure 5 here]

For a coalition to be classified as narrow-right, both factors (similarity of socio-economic

profile of core groups and substantial incorporation of business) must be jointly present. Neither

is individually sufficient. For example, a coalition of extremes with substantial business presence

on one end and poor agricultural workers on the other, which would be classified as wide-right,

is likely to place conflicting pressures on politicians. As a result, policymakers are unlikely to be

able to prioritize a capital-friendly agenda as those backed by narrow-right coalitions. On the

other hand, a coalition consisting of similarly placed poor groups may have congruent interests

but these are likely to be purely redistributive and not supportive of a pro-business policy regime.

4.2. Mechanisms – electoral coalitions and policymaking

Policymakers in developing countries trying to attract investment to their jurisdiction are

faced with two distinct pressures – the incentives to undertake capital-friendly policies and

redistributive pressures from the electorate. While most governments in poor and advanced-

industrial societies face such choices, the context in which decisions are made is qualitatively

different in developing countries. In developing democracies, the two sets of pressures arising

from capital and the electorate are often at odds with each other for several reasons. Developing

democracies not only have to face challenges arising from the very nature of late development

but are required to simultaneously balance the imperatives of development and democracy within

a context of limited resources. Creating a business-friendly policy framework requires

governments to offer a variety of incentives, concessions and provide specialized infrastructure

to attract capital to their jurisdictions.12 In doing so, they have to use scarce funds to create a

favorable investment climate. Prioritizing a pro-business agenda has clear opportunity costs and

such costs can result in considerable political contestation in developing countries.13 This is

particularly true in countries such as India where growth has not been inclusive and benefits have

12 Table 2 briefly outlines policies undertaken by governments to attract investment. Chapter 2 of my dissertation focuses on these measures in more detail. 13 For instance, as discussed in chapter 2 of my dissertation, subsidized land provided by governments to private capital in India demonstrates this trend clearly.

15

not been equally distributed. In addition, there is inherently a time-inconsistency problem. While

capital has to be favored in the short-run through policies and measures, benefits of growth

accrue only in the longer-term and are often uncertain. This poses major challenges in building a

political consensus for growth-related aims. In sum, policymakers in poor democracies typically

face a trade-off between capital-friendly goals, on one side, and redistributive imperatives, on the

other.

The key question then is when can states in developing democratic contexts undertake

business-friendly policies? I suggest that the interests of core groups in electoral coalitions are

significant in determining two aspects – the goals prioritized by the state and the balance

achieved between multiple aims. Certain types of electoral coalitions allow policymakers to

prioritize pro-business policies more than others. Specifically, narrow-right coalitions are most

likely to be favorable to creating capital-friendly environments for two reasons. First, the

redistributive pressures generated by narrow-right coalitions are less intense than those placed on

policymakers by wide-right, wide-left or narrow-left coalitions. Second, the confined nature of

economic interests implies that policymakers are not subject to contradictory demands. In other

words, they are not pulled in as many directions as policymakers backed by wide coalitions. As a

result, they enjoy insulation from pressures emanating from below and are able to create

attractive investment climates. In turn, investors respond favorably to these policy signals.

In contrast, narrow-left coalitions generate primarily redistributive impulses for

politicians. As a result, policies formulated by governments backed by narrow-left coalitions are

likely to be far less business-friendly than those undertaken by other coalitions. The two types of

wide coalitions represent intermediate cases. These coalitions share the feature that they include

economically-dissimilar core groups who have varied interests. While business incorporation is

substantial in wide-right coalitions, it is minimal in wide-left ones. Consequently, wide-right

coalitions tend to prioritize business-friendly goals more than wide-left ones. The diverse

pressures arising from both types of wide coalitions require policymakers to balance a variety of

contrasting goals simultaneously. They cannot prioritize growth-related policies to the extent that

those backed by narrow-right coalitions can. These coalitions are also not driven by purely

distributive motives as is the case with narrow-left coalitions. The record of governments

supported by wide coalitions on growth-related outcomes tends to be mixed.

16

4.3. The social origins of electoral coalitions: underlying cleavages, political

mobilization and coalition types

Narrow-right coalitions reflect a conjunction of political and economic power. If such

pro-capitalist coalitions are most amenable to attracting investment, a causally prior question

arises. How do they arise in poor democracies? This paper suggests that electoral coalitions have

social origins and are products of underlying cleavage structures. Beginning with the classic

work of Lipset and Rokkan (1967), the impact of social cleavages in influencing political

competition, especially the nature of party systems, has been widely explored. The argument put

forward here follows this extensive literature in suggesting that social cleavages condition the

nature of political competition and affect the construction of electoral bases of support.

As is the case elsewhere, the central concern for politicians in developing democracies

revolves around constructing electorally-successful coalitions. For a variety of reasons such as

the existence of well-established social arrangements, the presence of low information

environments and weak states, identity politics often acts as the basis of political competition and

participation in developing countries. In such cases where identity politics dominates, both party

strategies related to political mobilization as well as voter attachments tend to be conditioned by

pre-existing social divisions. Most importantly, underlying cleavages determine which groups

parties choose to mobilize and, as a result, determine the nature and composition of electoral

coalitions.

In the context of Indian states, this paper highlights two dimensions related to underlying

cleavages that affect the composition of electoral coalitions. First, I find that group size

influences party strategies related to electoral coalition formation; it determines whether parties

can rely on a few groups to construct electoral majorities or have to depend on a more diverse

base. Both Posner (2004b) and Chandra (2004) point to the effect of group size on political

competition. As Chandra suggests, large social groups that can be collectively mobilized have

been electorally efficacious across institutional contexts. This has been particularly true in FPTP

systems. Conversely, where groups are small, parties have incentives to employ a more catch-all

strategy.

While group size influences the likelihood of parties relying on confined or diverse

electoral bases, I suggest that the inclusion of business interests is linked to the nature of

resource control embodied by certain social cleavages. In particular, in ranked or other

17

hierarchical social institutions, there is often a relationship between social and economic status.

Business interests in such cases tend to be concentrated within specific social groups. In India,

domestic capitalists have typically emerged from those groups that have historically enjoyed

control of either capital or land by virtue of their position in the social hierarchy. If groups that

control economic resources are also numerically sizeable, this allows parties in poor democracies

to construct electoral majorities around these economically-advanced sections. As such, an

overlap between group size and resource control inherent in some cleavage patterns can lead to

an alignment of political and economic power in the midst of poor electorates.

The focus on pre-existing cleavage structures does not imply that political agency is

irrelevant. Indeed, as I outline in the case studies, coalition construction is an ongoing and

sequential process where politicians attempt to manipulate existing categories. In addition,

contextual details are particularly important to understanding specific dynamics of coalition

construction. The next section lays out the explanation in relation to Indian states. An illustration

of how the explanation works across Indian states may make the general framework above

clearer.

4.3.1. The origins of electoral coalitions with specific reference to India

The explanation I advance highlights the central role of caste in Indian politics. This has been

particularly true at the state-level (Chhibber 1999; Jaffrelot 2009). There are a variety of

mechanisms through which caste plays a prominent role in Indian politics – voters are primarily

mobilized on the basis of caste, it plays a crucial role in candidate selection and poll promises

often target specific caste groups. Several ethnic parties also exist at the regional level to

represent interests of one or more specific castes (Chandra 2004). Chhibber and Petrocik (1989)

show that even at the height of its national dominance, the Congress had very distinct caste bases

across states. Caste is equally critical when looking at voters. While not a universal phenomenon,

there tends to be strong similarity in voting patterns among members of individual castes (Brass

1990; Shah 2004; Yadav 1999).

Aside from its role in structuring political competition and participation, one other aspect

related to caste is relevant to the explanation. In India, caste has an overlapping correspondence

with class and social groups tend to be largely bound within particular economic classes in India.

In the broader dissertation, I attempt to demonstrate this by including a mapping of caste and

18

class based on survey data. As Jaffrelot (2009: 3) suggests “they [caste and class] have always

broadly overlapped and they still do, as evident from the National Sample Survey 2000 which

shows a remarkable correlation between caste and one’s standard of living…Unsurprisingly

caste and occupations coincide to a large extent.” In a similar vein, Harriss points out: “we know

that there is no neat mapping between class and caste but there are strong broad correspondences,

for example between land ownership and caste position…In practice, we have to study the

caste/class bases of different regimes in order to address the critical question of balance of class

power” (1999: 3368). This dissertation follows much of the Indian political economy literature

by taking into account the relationship between caste and class when describing electoral

coalitions.

Though caste cleavages remain the primary mode and idiom of political mobilization in

India, they tend to be localized and territorially contained within state boundaries (e.g., Brass

1990; Chhibber and Petrocik 1989; Chhibber 1999; Frankel 1989; Kothari 1970; Yadav 1999,

2004). Placing emphasis on these varied subnational political environments, I focus on two

dimensions – numerical size of social groups and economic resource control – and suggest that

the underlying social cleavages within Indian states can be divided into four basic patterns

(described in the next sub-section). 14 These patterns have led to divergent party strategies with

respect to political mobilization and have affected the nature and composition of electoral bases

of support. In India’s competitive FPTP system, the presence of large groups opens the

possibility that parties can depend disproportionately on such groups to construct electoral

majorities. As a result, they have fewer incentives to target a diverse range of social groups. In

contrast, small group size tends to force parties in India to appeal to a more diverse support base.

A second dimension of resource control inherent in certain cleavage patterns can be linked to

the inclusion of business in electoral coalitions in Indian states. Importantly, certain groups have

enjoyed access to resources, either capital or land, by virtue of their social status. Access to

resources, in turn, has resulted in those groups forming the main business sections in particular

states. The association between ethnicity and capital is particularly evident in the fact that the

social origins of entrepreneurship in India can be divided into two major strands. Entrepreneurs

in the first and older strand have typically emerged from traditional merchant and trading

14 I borrowed the idea of a four-fold caste structure from Atul Kohli. For details on regional patterns of caste, I drew substantially on Frankel and Rao(1989), Kothari (1970), Jaffrelot (2003) , Shah (2004) and Srinivas (1994).

19

communities within the social system. This includes groups such as Banias, Marwaris, Parsis,

Chettiars, Gounders, Khatris, Aroras, Sindhis, Khojas and a variety of other regional variants

(Damodaran 2008; Tripathi and Jumani 2007). Most of these groups occupied the position of

merchants and traders within the traditional social hierarchy. As a result, they enjoyed access to

capital and business networks and emerged as the country’s earliest industrialists. A second,

more recent, strand of entrepreneurs in India have arisen from certain landowning castes, who

have moved from commercial agriculture to industry (e.g., Baru 2000; Damodaran 2008; Sinha

2005). This shift has been particularly true of “dominant castes” such as the Patidars in Gujarat

and the Kammas and Reddys in Andhra Pradesh. The groups that form the bulk of capitalists in

the country have, thus, historically enjoyed control over economic resources, whether capital in

the case of the trading communities or land in the case of the dominant castes. This access to

resources arose as a result of the location of these groups within social hierarchy. As such, the

link between caste and capital remains significant.

In turn, parties mobilize groups primarily on the basis of caste and certain entrepreneurial

groups have been included on account of their social identity. However, the numerical strength

of business groups varies under different cleavage structures, resulting in differing political

leverage of capital across Indian states. In some states, entrepreneurial groups tend to enjoy

numerical strength and it is in such cases that narrow-right coalitions have emerged. The

different cleavage patterns and their effects on coalition construction are described in more detail

below.

4.3.1.1. Four cleavage patterns across Indian states

The first pattern includes states with “dominant caste” patterns, described in the seminal

sociological work of Srinivas (1994). In these states, certain castes, typically non-Brahmin, share

two features – they are numerically preponderant relative to other castes and enjoy considerable

economic power arising of out of landownership. Typically, dominant caste states include two or

more rival groups. States such as Gujarat, Andhra Pradesh, Karnataka, Haryana and Orissa tend

to follow this pattern. In Gujarat and Andhra Pradesh, the traditional access to land of dominant

castes enabled the transfer of surpluses from commercial agriculture into industry. As a result,

these groups came to form a major part of the entrepreneurial base in these states.

20

The second pattern, which is found mostly in the populous Hindi-heartland states of the

north, is one where the caste system conforms to the four varna structure.15 These states have

representation of castes (jatis) from all four varnas; lower castes form the vast majority of the

population but upper castes dominated all aspects of social and political life until the 1990s.

Certain large castes exist such as the Yadavs in Bihar (nearly 12 per cent of Bihar’s population)

and the Jats in UP. Unlike dominant caste states, these large castes did not control economic

resources and were socially marginalized. The entrepreneurial base in these states is thin and the

few producer groups that exist are small in size. One other aspect of the cleavage structure in the

Hindi-heartland has been emphasized by authors such as Jaffrelot (2003, 2009). Upper castes

form a greater proportion of the population in these states than in other parts of India. This partly

explains why their political domination lasted longer in the Hindi heartland than in the south or

west.

The third variation, which exists in southern states such as Tamil Nadu and Kerala, has some

similarities to the traditional varna structure found in the Hindi-heartland in that upper castes

were historically powerful both politically and socially. However, most castes tend to be small

and none is numerically preponderant. The apex of the structure tends to be much narrower with

upper castes forming a much smaller proportion of the population than their counterparts in the

Hindi-heartland, facilitating the emergence of lower caste social movements in the south even in

the colonial era (Jaffrelot 2003). A variety of landowning groups, smaller merchant castes and

some upper castes came to form the entrepreneurial class but tend to be small in size.

Finally, there is a fourth group of states such as Punjab and West Bengal where other

dimensions such as religion have acted in conjunction with caste (Kohli 1989). The cross-cutting

nature of cleavage patterns in these states has resulted in politically-relevant social groups being

small size. As in the southern pattern, entrepreneurial groups also tend to be small. The cross-

cutting nature of cleavages and small group size implies that parties cannot rely

disproportionately on a single social group to create electoral majorities.

15 At the most basic level, the caste system can be conceived of a four-fold ritual hierarchy. The four main macro-groupings or varnas are the Brahmins, Kshatriyas, Vaishyas and Shudras. Outside these four broad groupings of the caste system are the Dalits or scheduled castes, who are considered to be at the bottom of the pyramid in terms of ritual status. Within these varnas lie a multitude of horizontal or segmental categories known as jatis. As scholars have pointed out, the actual operationalization of caste tends to be as jati (e.g., Brass 1990; Chhibber 1999; Kothari 1970; Yadav 1999). Jatis are largely localized.

21

4.3.1.2. From cleavage patterns to electoral coalition types

These different patterns with their attendant mix of numerical size and resource control have

affected party competition and coalition formation in dissimilar ways. Under India’s simple

plurality system, large groups have enjoyed considerable electoral salience and parties have been

able to rely on a small base of support where such groups are present. As such, narrow coalitions

have tended to occur in those states such as Gujarat, Andhra Pradesh and Bihar where

numerically large sections are present. 16 Wide coalitions, in contrast, have been constructed in

states where there are numerous small groups and no group is large enough to dominate

electorally. Parties, thus, have to rely on a relatively diverse base of voters. This tends to be the

case in states such as Tamil Nadu and Kerala as well as West Bengal and Punjab.

The extent of business representation has been determined by the caste-capital link, which

remains significant in India. Parties mobilize primarily on the basis of caste and business groups

tend to be concentrated within particular castes. Though the caste-capital association exists under

all four cleavage patterns described earlier, it is only under dominant caste structures that

business groups enjoy numerical strength. As a result, business groups are electorally-significant

only under dominant caste patterns. The convergence of political and economic power and the

emergence of narrow-right coalitions are, therefore, most likely under such cleavage structures.

The ability of narrow-right coalitions to win elections has been assisted by the nature of

India’s competitive FPTP system, where parties have formed governments with a plurality of

vote. The vote share required to form governments at the state level in in India in the last two

decades has typically fluctuated between 35 and 40 per cent. In states where electoral

fragmentation is high, the threshold for victory has been particularly low.17 In short, elections

can be won with vote shares less than 50 per cent; allowing parties to rely on specific vote banks

rather than creating a diverse base of support. In dominant caste states, the presence of large

entrepreneurial groups has allowed parties to rely disproportionately on these sections. It is caste-

based mobilization that predicates such situations in the first place.

16 Narrow coalitions are not necessarily comprised of a single caste. In most cases, no single caste can provide sufficient electoral support and multi-caste coalitions are a necessity (Chhibber 1999). However, multi-caste coalitions in India do not always include a large number of groups. 17 For example, the average vote share of the largest party in elections in Bihar between 1990 and 2005 was 28.62 per cent.

22

A robust base of capital also exists under the southern Indian and cross-cutting cleavage

patterns. However, producer groups in these cleavage patterns are small. The lack of numerical

strength of single caste groups has meant that parties have to resort to catch-all strategies and

build diverse bases of support. As a result, wide-right coalitions tend to arise in these states.

Finally, the Hindi-heartland, over the last two decades, has seen configurations that are on the

opposite end of the spectrum from narrow-right coalitions. Large caste groups exist in these

states but these groups are also the most economically-marginalized sections of society. As a

result, narrow-left coalitions are more likely to arise in these states and the potential to create

business-friendly coalitions is limited.

While party strategies are predicated on the nature of the underlying cleavage structure, the

process of coalition-building is not static. Political agency matters and politicians have

attempted to aggregate or disaggregate cleavage dimensions with varying success. Since political

competition is also strategic, choices of parties at different points in time are also conditioned by

what their competitors do. In addition, past choices matter in relation to current mobilization. In

short, coalition construction can be thought of as an ongoing process where underlying cleavage

structure makes certain strategies and certain types of coalitions more likely in the first place.

These strategies, in turn, have a feedback effect. Coalitions within a particular state can, thus,

shift over time. To highlight the fact that coalition building is evolving, I chronologically trace

the process of coalition construction in the post-independence period in each of the case studies.

5. Empirical evidence : policy variation and two case studies

The starting point of the explanation is that some states have been pro-active in undertaking

policies and measures to attract investment to their jurisdictions than others. Chapter 2 of my

dissertation lays out policy variation across the four case study states in more detail. In this

paper, I provide a brief summary of these differences. Based on an analysis of industrial policy

documents of state governments, other government documents, interviews and newspaper

reports, undertaken during fieldwork in 2009-10, policies across the four case study states were

compared. Variation is discussed along eight broad dimensions– infrastructure, incentives and

subsidies offered, regulatory environment related to starting and operating a business, labor laws,

government role in land acquisition by industry, creation of special economic zones (SEZs),

institutional infrastructure for industrialization and branding and promotion activities.

23

Subnational governments have substantial, if not sole, jurisdiction in these areas. These

dimensions are also typically highlighted in both policy reports relating to investment climate

and investor surveys as being important (e.g., WorldBank 2005, 2006, 2007B). Interviews with

investors during fieldwork confirmed the salience of these aspects.

Based on the eight areas above, I find that some states have clearly been more pro-active than

others (table 2 provides a brief summary).18 This has meant that the speed and scope of policies

formulated as well as implementation of these policies have differed across the four states and, in

some cases, within these states over time. Among the four case study states, Gujarat and Andhra

Pradesh (between 1994 and 2004) have been more aggressive in their efforts to attract

investment while Punjab has lagged behind. For most of the post-1991 period, Bihar remained

apathetic to investment promotion as well as most developmental efforts in general. However,

there has been a noticeable change in the state over the last six years.

[Table 2 here]

The core argument of this paper suggests that this variation in state agency in the competition

for investment can be explained by the nature of electoral coalitions backing governments. In

turn, these electoral coalitions themselves can be traced to underlying cleavage structures.

Below, I present evidence from two of the four model-building cases in the dissertation – Gujarat

and Punjab. These two states are among India’s richest and both enjoyed strong preconditions for

investment success at the start of the reforms process in 1991. However, the contrast in their

performance has been stark – while Gujarat has been extremely successful in attracting

investment after 1991, Punjab has demonstrated considerable apathy to the competition for

investment. I suggest that this variation can be traced to the nature of electoral coalitions.

5.1. Gujarat – narrow alliances and business-friendly policies

Created in 1960 from the bifurcation of the erstwhile Bombay state, Gujarat has been one of

the most industrialized and prosperous states in the country over the last five decades. Though it

accounts for only 5 per cent of the India’s population, Gujarat is responsible for over 15 per cent

18 A more detailed version of the table is in chapter 2 of my dissertation.

24

of the total output of organized industrial sector in the country.19 Gujarat’s growth performance

in the post-reforms period has been particularly impressive. Between 1991-92 and 2009-10, the

state’s gross state domestic product (GSDP) grew at an average annual rate of over 8.1 per cent

compared to a national average of 6.5 per cent. The state has also been among the top performers

in terms of investment outcomes - between 1991 and 2010, receiving 11.8 per cent of investment

in the country by total value. Gujarat has been extremely pro-active in the competition for private

investment and has been consistently investor-friendly throughout the post-1991 period.

On the surface, Gujarat’s success in attracting investment in the post-1991 period is not

entirely surprising. The region has a long history of entrepreneurship – a thriving maritime trade

existed even in pre-colonial times. In many ways, Gujarat has been a classic developmental state

since its formation in 1960 (Sinha 2005). It has long prioritized growth more than other

objectives and the state has played an active role in the industrial realm. As was the case with

several developmental states in East Asia and Latin America, rapid growth in Gujarat has been

accompanied by illiberal political trends. Strongly majoritarian politics has characterized the

state, particularly since the 1990s, and there have been high levels of social, political and

economic exclusion of certain groups, chiefly Muslims and, to a lesser extent, scheduled tribes

(e.g., Hirway 2000).

While pre-1991 factors have no doubt shaped Gujarat’s response to the competition for

private investment in the post-1991 period, a sole focus on continuity leaves several issues

unaddressed. First, how and why has Gujarat maintained its economic dominance in the post-

1991 period when some other states have managed to squander their pre-1991 advantages? As

the case study of Punjab will show, favorable initial conditions are not sufficient for success in

the competition for investment. Second, Gujarat has been more pro-active and has outperformed

even other high and middle income states. How and why did Gujarat adapt more quickly to

economic liberalization than similarly placed states? These questions merit additional

explanation.

5.1.1. A background of Gujarat’s society and pre-1991 politics

19 Population figures from the Census of India 2011 (provisional tables, Table 1; censusindia.gov.in; accessed May 30, 2011). Share of industrial output calculated from total output data of the factory sector from the Annual Survey of Industries 2008-09, CSO, Government of India (Table 3; mospi.nic.in; accessed May 30, 2011).

25

Gujarat’s cleavage structure exemplifies “dominant caste” patterns. The Patidars are the

main dominant caste in the state. They are numerically sizeable, accounting for over 12 per cent

of the state’s population, and have historically enjoyed economic power through the control of

land (Kohli 1990; Shah 1989).20 Largely involved in commercial agriculture, the Patidars began

transferring surpluses to industry since the late 19th century (Sinha 2005). They now constitute

one of the main entrepreneurial groups in the state. Banias, who account for approximately 3 per

cent of the population, also have a significant presence in industry. Brahmins comprise about 4

per cent of the state’s population and are mainly involved in white-collar professions. Together,

these three economically-advanced castes – Patidars, Brahmins and Banias – have largely

controlled Gujarati politics for most of its fifty-one year history.

The main lines of conflict in Gujarat have been between the aforementioned castes and

another large group, the Kshatriyas. Though strictly a political aggregation of several groups, the

Kshatriyas, who constitute approximately 29 per cent of Gujarat’s population, operate socially

and politically as a caste grouping and have come to represent the main challenge to Patidar

political dominance (Kothari and Maru 1970; Kohli 1990). The Kshatriyas exhibit considerable

economic diversity and include some wealthy sections as well as several poorer sections within

their ranks. The most economically and socially-marginalized groups in Gujarat include Dalits

(7.1 per cent), Adivasis (4.8 per cent) and Muslims (9.1 per cent) of the population.21

For the first decade and a half after its formation in 1960, Gujarat was a one party state

ruled by the Congress. The state’s economically-advanced castes, namely the Brahmins, Banias

and Patidars, overwhelmingly dominated Gujarati politics in this period and the Congress’

internal dynamics reflected their supremacy. Low levels of mobilization of marginalized groups

and intra-elite harmony meant that the state’s politics “had an aura of gentility” (Kohli 1990:

244). Sinha (2005) suggests that the institutional framework for subsequent industrialization was

largely put in place during this period.

20 The 1931 census in India was the last one to collect information on individual castes other than scheduled castes and scheduled tribes. Scheduled caste and scheduled tribe populations are counted in each Indian census. Despite the short-coming of not having updated details on individual castes, most studies on Indian politics, including the ones cited in this paragraph, use the 1931 data and extrapolate from it. I use estimates of individual caste populations from these studies. 21Data from Census of India 2001 (censusindia.gov.in).

26

The general placidity of this early period was jolted considerably in the mid-1970s. One

of the main reasons was high levels of conflict between the state’s two numerically large castes –

the Patidars and Kshatriyas. Until the 1960s, the Kshatriyas had largely been excluded from

power, leading to considerable alienation. By the early 1970s, they were ripe for mobilization

and this was substantially exploited by Indira Gandhi. The split in the Congress in 1969 between

the Indira Gandhi-led Congress (R) and the Morarji Desai-led Congress (O) had major

repercussions in Gujarat and resulted in a realignment of social bases. In response to the

Congress’ increasing leftward orientation and populist commitments, the more conservative

social groups in the party began to search for alternatives. Subsequently, these sections backed

Desai’s wing of the party over Indira Gandhi’s (Sud 2007).

Indira Gandhi, however, managed to prevail over the Congress (O) in Gujarat. As part of

her broader strategy throughout the country, she mobilized weaker socio-economic groups who

had been politically ignored until then. In Gujarat, the numerically large Kshatriyas as well as

Dalits and Adivasis were mobilized through a strong rhetoric of populism and a variety of

redistributive promises. The ascendancy of the Kshatriyas in the Congress, in turn, elicited a

sharp response from the Patidar-Brahmin-Bania alliance. Most notably, their opposition took the

form of the Navnirman movement – which started as a student-led protest against corruption and

inflation but morphed into wider opposition against Congress rule. Throughout 1974, the state

saw a cycle of violence with constant riots, street protests and subsequent government

repression. The protests led to the fall of the government and a coalition of parties under the

Janata formed the first non-Congress government in the state in 1975.

The Congress regrouped and came back to power through a successful electoral strategy

that brought together an alliance of Kshatriyas, Harijans (Dalits), Adivasis (scheduled tribes) and

Muslims under the acronym KHAM. Members of the KHAM alliance were rewarded with

considerable representation in the Madhavsinh Solanki-led Congress government that came to

power in 1980. Almost seventy percent of Solanki’s cabinet was filled by legislators with a

KHAM background, a clear signal to the Patidar-Brahmin-Bania alliance of the changing power

dynamics (Wood 1987). On returning to power in 1985, his policy agenda was far more

controversial. One of the policies Solanki undertook was to institute reservations (affirmative

action policies) for other backward castes (Kshatriyas constitute a major portion of the OBC

27

grouping in Gujarat).Tension between the Brahmin-Bania-Patidar group and the KHAM alliance

had been brewing since the early 1980s over the former’s sudden exclusion from power and the

announcement of reservations proved to be a flashpoint. Six months of rioting and violence led

to the replacement of Solanki by another Congress leader, Amarsinh Chaudhary. Chaudhary

gave into the demands of the protesting elite castes, first dropping several KHAM members from

his cabinet and then putting reservations on hold.

The anti-reservation riots allowed the dominant Patidar-Brahmin-Bania alliance to regain

their political hold on the state, which continues till today (Patel 1999; Shah 1987, 1991, 1996,

2007; Sud 2007). However, this dominance would occur in the 1990s in a new form – the Hindu-

nationalist BJP. What began as an upper-caste student agitation against reservations of the

Solanki government was taken over by the BJP and its affiliates and soon morphed into riots

against the state’s Muslims and lower castes. For Shah (1996, 2007), the anti-reservation riots of

1985 was the crucial point at which the BJP began to reap the rewards of a strategy to cut the

electoral pie across religious lines.

5.1.2. Gujarat in the post-1991 period: BJP dominance and narrow-right coalitions

The major foothold it gained through riots represented the beginning of the BJP’s upward

rise in Gujarat. This period also saw the reassertion of the Patidar-Brahmin-Bania alliance after

the interlude of the 1980s. Since 1990, the BJP has held significant sway – it was part of a

coalition government that headed the state between 1990 and 1994 and has headed governments

almost continuously from 1995.22 Given the levels of anti-incumbency in state politics in India

over the last two decades, this is rare. Since the mid-1990s, the state has become a firmly two-

party state – the Congress competes with the BJP but has not bettered its rival in either a

parliamentary or assembly election since 1995. Compared with other states, politics in Gujarat

has been relatively less populist. New groups have been mobilized both through a Hindu

nationalist plank as well as some targeted welfare schemes; in contrast to less discretionary

redistributive promises elsewhere.

22 The sole exception was a brief period between 1996 and 1998 when a group of defectors led by Shankarsinh Vaghela broke away from the BJP to form a new party, which briefly headed the government.

28

State politics in Gujarat has taken a strongly majoritarian flavor since the 1990s. The

BJP’s agenda in Gujarat, which has mixed Hindu nationalism with Gujarati subnationalism

(“Gujarati asmita”), is aimed at attracting a majority of Hindus in the state while excluding

certain groups, notably Muslims. The most notorious episode in the state’s recent majoritarian

history was the communal pogrom in 2002, where over 2000 people, largely Muslim, were

killed. Since 2001, the state has been headed by its controversial chief minister, Narendra Modi.

Celebrated in business circles for leading an efficient, investor-friendly and relatively clean

administration, he is equally vilified outside these circles for his role in the 2002 riots.

The 1990s has seen a polarization in the social bases of the BJP and the Congress.

Backed by a coalition comprising primarily of three core groups – the Brahmins, Banias and

Patidars – the BJP has won clear electoral majorities over the last decade and a half. In fact,

many authors view the emergence of the BJP itself as a reassertion of Brahmin-Bania-Patidar

dominance after the KHAM experiment in the 1980s ( Shah 2007; Patel 1999; Prakash 2003). As

table 3 shows, a considerable majority of upper castes vote for the BJP in comparison to the

Congress. In particular, support from the dominant Patidars for the BJP is significant. Based on

post-poll surveys, Kumar (2003b) finds that 82 per cent of Patidars voted for the BJP in the 2002

assembly elections while Jani (2009) suggests that 87 per cent of this group supported the BJP in

2009. Interestingly, the BJP’s support decreases among economically-weaker sections of Gujarat

such as the Dalits and Adivasis; these sections vote predominantly for the Congress. The

Congress, however, has not formed a government in Gujarat since 1990.

[Table 3 here]

While the core Patidar, Bania and Brahmin groups have firmly been in the BJP’s fold

since the early 1990s, the party has attempted to widen its base through a combination of Hindu

unity appeals, a stress on Gujarati subnationalism and development programs (Heath 1999; Patel

1999; Shah 2007; Sud 2007). The BJP’s attempts at expansion, however, have seen mixed and

temporary results. It did manage to gain increase its support among some OBC sections,

particularly those such as the wealthier Rajputs in the mid-1990s. However, the BJP, on the

whole, has also failed to divert Dalit and Adivasi support from the Congress in any substantial

measure.

29

In terms of socio-economic profiles, the core groups that support the BJP tend to be

considerably more privileged than those that form the Congress’ base. A majority of richer

groups support the BJP while Congress sees an opposite trend (e.g., Shah 2007). Using their

higher social status, the Brahmins and Banias were the first groups to take advantage of

educational and employment opportunities under the British (e.g., Shah 1987; Wood 1987). By

independence, these groups largely were in white collar professions in urban areas and those that

remained in rural areas were largely landed and wealthy. Until the 20th century, the Patidars were

largely rural, landed and primarily involved in commercial agriculture (Sinha 2005). The

Patidars also had a long tradition of overseas migration from India since the 19th century but

maintained strong links by sending investible surpluses back to their villages. The first four

decades of the 20th century saw a major socio-economic transformation of the Patidars. They

began transferring surpluses accrued through commercial agriculture and overseas migration into

industry. The education levels of this group also began to rise dramatically. The access to

resources and education facilitated the entry of the three elite castes into industry. These groups,

particularly the Patidars, comprise the bulk of the entrepreneurial class in Gujarat (Shinoda

2000). Shinoda’s study also shows that these three groups are dispersed across several industries

and have a strong foothold in the more capital-intensive and technologically advanced sectors of

the Gujarat economy. These castes were the main beneficiaries and supporters of the state’s

industrialization agenda in the 1960s and 1970s and this period witnessed a major expansion in

the Gujarat’s middle class led by these three castes.

5.1.3. Tracing the mechanism – coalitions, interests and policies

The BJP has won comfortable electoral majorities since the 1990s relying on a coalition

comprising three economically powerful and dominant castes. I classify this coalition as narrow-

right. The three castes, Patidars, Brahmins and Banias, comprise the majority of the capitalist

class in the state. Moreover, the core groups have a similar economic profile and representation

from poorer groups is relatively limited. This narrow-right coalition has essentially remained in

place since 1990. The economically-advanced and entrepreneurial nature of this coalition has

allowed Gujarat to prioritize investment and these core groups have been strongly supportive of

the state’s investor-friendly framework.

30

Gujarat in the 1990s has emphasized attracting private investment as one of its chief

aims and it is only very recently that the state has begun to belatedly focus on human

development. Policies have been more business-friendly than elsewhere. Among other aspects,

the state has prioritized infrastructure development, eased the regulatory environment, facilitated

the acquisition of land for industry and offered a variety of concessions. In many ways, Gujarat’s

exclusionary politics and commitment to growth is reminiscent of descriptions of classic East

Asia developmental states (e.g., Evans 1995; Kohli 2004; Wade 1990). Interestingly, Gujarat’s

own policy documents and government rhetoric have viewed the Asian “tigers” as models to

emulate (e.g., Gujarat 2003).

The pro-active role played by the state in investment promotion can be traced to the class

profile of the core groups backing Gujarat governments. Redistributive pressures on the state

have been relatively less intense than those seen elsewhere in the country. The entrepreneurial

nature of the BJP’s core groups has allowed the party to prioritize investment over other

concerns. Populism has also not dominated politics in Gujarat as it has in other states. The

mobilization of new groups has been mainly attempted through emotional appeals of Hindu

nationalism with some targeted welfare measures. The government has generally tended not to

reward electoral support through large populist schemes such as free electricity as other state

governments have. The finances of the state have remained buoyant, letting the state focus on

improving its business environment and building infrastructure. In short, the composition of

Gujarat’s electoral coalitions and the nature of their interests have allowed the state to create a

policy regime that is extremely favorable to attracting private investment.

5.1.4. Explaining the emergence of narrow-right coalitions in Gujarat

Under dominant caste patterns in Gujarat, certain groups in Gujarat are numerically

preponderant and historically enjoyed over resources, particularly land. The combination of

numerical strength and resource control, in turn, has predicated the emergence of narrow-right

coalitions. The size of the dominant castes has allowed parties, particularly the BJP since the

1990s, to construct successful electoral coalitions around this group. The BJP has supplemented

Patidar support with that from Brahmins and Banias to create electorally-successful coalitions.

These three castes are also largely entrepreneurial; their entry into industry can be traced to their

access to economic resources arising from their social position. The rival to the BJP in the state –

31

the Congress – has since the 1970s built its electoral base around another large caste - the

Kshatriyas - as well as Dalits, Adivasis and Muslims. This core groups in the Congress’ coalition

are economically-weaker than those of the BJP.

The timing and emergence of these distinct electoral coalitions of the Congress and BJP

reflect shifting mobilization strategies of these two parties. Gujarat witnessed Congress

dominance until the 1970s and control of party politics lay in the hands of a set of Patidar,

Brahmin and Bania elite. Though numerically sizeable, the Kshatriyas had been excluded from

the top rungs of power of the Congress for the first decade after Gujarat’s formation and were

looking for alternative channels. The emergence of Indira Gandhi and the split in the Congress in

1969 would provide the avenue for Kshatriya political expression and have major consequences

for the future of Gujarat’s politics. As part of her battles with the Syndicate – a coterie of

regional leaders who controlled power within the Congress – Indira Gandhi would come to

mobilize the poor throughout the country through populist promises. Her broader political

agenda in the country would result in a realignment of the support base of Congress in Gujarat.

This realignment set the stage for much of the political change that followed in the next thirty

years.

From a party that was once dominated by the Patidars, Brahmins and Banias, the Congress in

the 1970s would come to build its base around Kshatriyas, Dalits, Adivasis and Muslims. Under

Indira Gandhi’s direction, the party would put in place a strategy of predominantly nominating

backward castes, tribals and Muslim candidates on the party’s tickets (Sud 2007). By

successfully mobilizing the Kshatriyas along with the Harijans (Dalits), Adivasis and Muslims

(the strategy came to be known by its acronym KHAM), the Congress stormed back to power in

Gujarat in 1980 after losing the 1977 elections. On returning to power in 1985, the Congress

under Madhavsinh Solanki, even more controversially, attempted to institute reservations

(affirmative action policies) for the other backward castes (OBCs) and Dalits, who comprised a

considerable portion of the KHAM alliance. This would trigger a violent response from the

Patidar-Brahmin-Bania group in the form of anti-reservations protests.

These protests provided an opening for the BJP as it took over the riots and managed to shift

it to a movement against Muslims and lower castes. Eventually the dominant Patidar-Brahmin-

Bania alliance managed to regain their political control of the state through the BJP, a position

32

they continue to hold (Patel 1999; Shah 1987, 1991, 1996, 2007; Sud 2007). The BJP has built

its base around these three core groups. Though it attempted to expand its base to backward

castes, Dalits and Adivasis, this strategy has only had limited success. In sum, coalition

construction in Gujarat has been largely predicated on the underlying caste structure. The

numerical size of the Patidars and Kshatriyas allows parties to build narrow coalitions around

these groups. In addition, the entrepreneurial nature of certain castes allows for the distinct class

composition of the BJP’s electoral bases.

5.2. Punjab – wide-right alliances and competitive populism

In contrast to Gujarat, Punjab has been slow to react to the post-1991 environment despite

possessing sound infrastructure and a relatively well-developed industrial base prior to reforms.

Created in 1966, Punjab is India’s only Sikh majority state. For most of India’s post-

independence history, the state had the highest per capita income in the country. While the state

has seen higher levels of prosperity than most other parts of India, it also has a long history of

political crises and violence. Punjab was partitioned between India and Pakistan in 1947 and, as

a result, witnessed tremendous levels of displacement, turmoil and violence. The state, however,

managed to recover and was at the forefront of the Green Revolution in the 1960s and 1970s.

Political troubles once again surfaced in the form of a Sikh separatist movement in the late 1970s

and 1980s. The period of militancy came to an end in the early 1990s and the state has remained

peaceful since then.

Punjab has historically been the grain bowl of India. Though the state is mainly rural (almost

70 per cent), agriculture contributes only a quarter of the state’s gross state domestic product

(GSDP) while industry and services have larger shares of nearly 32 per cent and 44 per cent

respectively.23 Though agriculture is a vital part of the state, a vibrant small-scale industrial

sector exists in the state. Since 1991, however, Punjab began regressing economically and both

agricultural and industrial growth stagnated. Despite being in the throes of militancy for most of

the 1980s, the state’s industrial growth was well above the national average. However, the return

of peace in Punjab coincided with slow industrial growth. While Punjab’s manufacturing growth

between 1980 and 1990 was 9.32 per cent, it decelerated to 5.74 per cent between 1991 and

23 GSDP data from Central Statistical Organization, Government of India (mospi.nic.in).

33

2001. Authors suggest that the state’s rich agricultural base, infrastructure and entrepreneurial

culture provided excellent pre-conditions for industrial growth at the start of the reforms process

in 1991 but the state has simply been too slow and apathetic to adjust to the needs of economic

liberalization (Ahluwalia et al. 2008; Singh 2005).

This section will argue that the state’s indifference towards attracting investment can be

traced to the nature of the electoral coalitions that have backed various governments since the

early 1990s. The contradictory interests and demands of Punjab’s electoral alliances have

necessitated a complex balancing act on the part of several governments. This has, in turn, led to

a vicious cycle of competitive populism that has drained the state’s finances and adversely

affected the state’s ability to attract investment. Resources aside, the predominantly agricultural

nature of these coalitions has also meant that policy-makers have weak electoral incentives to be

industry-friendly.

5.2.1. Brief background of society and pre-1991 politics in Punjab

The story of Punjab’s politics has been one of interactions between three different sets of

cleavages – religion, a rural-urban dimension and caste. Punjab since 1966 has been the only

Sikh majority state in the country. Sikhs comprise almost 60 per cent of the state’s population

while Hindus account for approximately 37 per cent.24 Historically, there has been a mapping

between the religious and rural-urban dimensions in Punjab. Sikhs have been largely rural while

Hindus were primarily involved in trade and commerce and largely identified as an urban group

(Kumar 2006; Wallace 1989). Urbanization has blurred these boundaries over time. Sikhs and

Hindus in the state have, largely, not acted as a coherent political entity and internal divisions

within these groups have been vital. Both caste and rural-urban distinctions exist, dividing Sikhs

and Hindus internally.

Unlike most other Indian states, caste has operated in conjunction with other cleavages.

The cross-cutting nature of cleavages has meant that politically-relevant groups are of a small

size. The Jats, a predominantly landowning agricultural caste present among both Hindus and

Sikhs, are among the state’s larger social groups. They comprise approximately 35 per cent of

the Sikh population (Wallace 1989). Punjab’s Dalits comprise 28.9 per cent of the state’s

24 Data from Census of India (2001), accessed from indiastat.com.

34

population, the highest proportion in all Indian states.25 Dalits, who are also found among both

Hindus and Sikhs, have, however, not been mobilized politically as a single group. Among the

twice-born castes, Brahmins tended to have a small presence in Punjab (3.7 per cent) while

Rajputs are more sizeable (8.3 per cent).

In the immediate post-independence period, Punjab witnessed the dominance of the

Congress. In the early 1950s, the SAD, the main party representing the Sikhs, began making

demands first for a Sikh majority state and then for a separate Punjabi-speaking state (“Punjabi

Saba”). The demand, however, was rejected by the States Reorganization Commission. Despite

fraying Hindu-Sikh cooperation in the state, communal conciliation and accommodation

essentially characterized the 1950s due to a leader of considerable strength within the Congress –

Pratap Singh Kairon. As a Jat Sikh with a strong Nehruvian nationalist bent, Kairon was able to

bridge Hindu and Sikh concerns. Kairon also reformulated the Congress’ pre-independence

support base to create a coalition that was more fully representative of religious, class, caste,

rural-urban and regional dimensions of Punjab’s polity. By including a variety of elector profiles

within its fold, the Congress’s strategy was to appropriate the political middle ground (Wallace

1989). The party has continued to adopt the same strategy.

Factional politics weakened the Congress in the 1960s. At the same time, the SAD began

to reiterate its demands for a separate Punjabi Saba. With mounting pressure on the eve of the

Indo-Pakistan war in 1965, the Congress high command in New Delhi agreed to the creation of a

separate Punjabi-speaking state in March 1966; resulting in the borders of Punjab being redrawn.

The early to mid-1970s was a period of considerable change and turmoil at the national level

with Indira Gandhi first consolidating her power and then leading India into a brief tryst with

authoritarianism. During the Emergency, Indira Gandhi tried to make overtures to the SAD in

Punjab but the party was highly critical of her methods and supported the opposition Janata

coalition. On the back of popular discontent with the Emergency, the Janata unseated the

Congress at the national level for the first time in India’s history in 1977. In Punjab, the SAD-

Janata coalition won the 1977 assembly elections, though the government fell only two years

later.

25 Data from Census of India 2001 (censusindia.gov.in)

35

The Janata collapse paved the way for a particularly violent period in the 1980s when

Sikh militancy came to the fore in Punjab. Indira Gandhi and the Congress stormed back to

power in 1980. In a bid to undercut the SAD’s influence with Sikhs, the Congress propped up an

extremist preacher, Jarnail Singh Bhindranwale, in the late 1970s. Over the next few years,

Bhindranwale would come to lead a violent secessionist movement that demanded the

independence of a separate Sikh state, Khalistan, from India. The situation would come to a head

in the summer of 1984 when Operation Bluestar was mounted by the Indian army in an attempt

to remove Bhindranwale and his group from the Golden Temple in Amritsar, Sikhism’s holiest

place of worship where the militants had set up camp. Though successful in killing

Bhindranwale and his followers, the heavy-handed approach of the Indian army served to

exacerbate the situation and create sharp polarization between Hindus and Sikhs. Operation

Bluestar would also end up claiming Indira Gandhi’s life – she was assassinated in October 1984

by her Sikh bodyguards in retaliation. In turn, her killing would spark major riots in New Delhi

and surrounding areas.

Rajiv Gandhi, who succeeded his mother as Prime Minister, would adopt a more

conciliatory approach. Several steps were taken towards a solution, including a peace accord in

1985 with the moderate leader of the SAD, Sant Longowal. However, violence continued over

the next few years. Sikh militancy, however, turned excessively violent in the late 1980s, which

led to rapidly declining support for the Khalistan movement (Jodhka 2005; Van Dyke 2009).

Through considerable military force and some carrots over the next few years, the Indian

government managed to regain its hold on the state. Punjab saw a return to peace and the

Khalistan movement virtually ended by the early 1990s (Kumar 2006; Kumar 2003a; Singh

1998).

5.2.2. Post-1991 politics and social bases of electoral support

With a return to peace, Punjab has seen a bipolar configuration with the SAD and

Congress as the main parties. The BJP has emerged as a third party with considerable clout and

has had formal alliances with the SAD since 1997. Punjab has seen high levels of anti-

incumbency in the 1990s. The Congress won elections in 1992 and 2002 while the SAD-BJP

combine was in power from 1997 to 2002 and has been heading the state since 2007. With the

end of separatism in Punjab, political articulation along religious lines began to subside. Jodhka

36

(2005) suggests that religion had been sole axis of politics in the 1980s during the height of

militancy and, with “normal politics” returning to the state, caste, class and regional interests

have come back to the forefront.

This return to “normal” politics has meant that parties have once again been forced to

balance a variety of different pressures. This is particularly evident in the approaches of the two

main parties to political mobilization and coalition-building. Outflanked by the largely Sikh SAD

and the Hindu-nationalist BJP, the Congress since the mid-1950s has been a catch-all party and

its support continues to be derived from a diverse social base that cuts across religion, caste,

class and region (table 4a and 4b). I classify these as electoral coalitions as wide-right. Its base

consists of a range of socio-economic profiles including agricultural, industrial, upper caste and

scheduled caste groups. The Congress can also be considered marginally less rural than the SAD

but this difference is not substantial. Most Punjab governments have, first and foremost, to cater

to the state’s powerful agricultural sector.

[Table 4a and 4b here]

The SAD’s strategy has been somewhat distinct from the Congress. As a predominantly

Sikh party and more specifically one dominated by the agricultural Jat Sikhs, electoral alliances

have been a necessity for the SAD. The core support base of the SAD and its appeal as a

primarily Sikh party has meant that it has to seek a broader alliance to create an electoral

majority. Since the mid-1990s, the SAD has worked to enlarge its predominantly Sikh vote base

through a formal coalition with the Hindu-nationalist BJP and the alliance won state assembly

elections in 1997 and 2002. The SAD-BJP alliance has succeeded electorally because of the

complementary nature of the social bases of the SAD and the BJP – the former’s core base is

predominantly agricultural and Sikh while the latter’s mainly urban and Hindu. The coalition

includes representation of business interests, chiefly through the BJP’s Hindu groups. As in the

case of the Congress, the coalition backing SAD-BJP governments is also classified as wide-

right due to the fact that it includes a diverse range of socio-economic profiles as well as

representation of business interests.

37

5.2.3. Tracing the mechanism – wide-right coalitions to competitive populism

Given the interaction between various cleavage dimensions, social groups in Punjab

generally lack numerical strength. Support from a broad range of voters has, thus, been vital to

electoral success in Punjab in the post-1991 period. Both the Congress and SAD-BJP

governments have been backed by wide-right coalitions in the 1990s. Incorporation of groups

with a diversity of socio-economic profiles has, however, pulled various Punjab governments in

different directions. This has led both Congress and the SAD-BJP governments to balance

diverse demands through pure populism (e.g., Kumar 2006; Kumar 2003a; Singh 1998). Punjab

has a long tradition, dating back to the Green Revolution in the 1960s, of placating groups

through subsidies of various kinds such as fertilizer concessions and free electricity. Such

populism has taken a more intense form since the 1990s.

In many ways, competitive populism has been the dominant pattern of politics in Punjab

since the mid-1990s. The question of who receives free electricity is one such issue that has been

contested vigorously and provides insight into the type of politics prevailing in the state. “The

politics of populism introduced new competition among various sections of the population. It

was alleged that Mr. Badal’s [the chief minister of the SAD-BJP government] populism is pro-Jat

peasantry and it discriminates against other sections of society. For instance, the Bahujan Samaj

Morcha, an ally of the Akali Dal (Badal), asserted that the Punjab Chief Minister’s decision to

give free electricity to farmers created a wide gap between the farming community, those living

in urban areas and Dalits [scheduled castes]…In response to these assertions, the state

government decided to give free domestic power up to 30 units each per month to those

Scheduled Caste consumers who had a sanctioned load of not more than 300 watts. The effort of

the state government to appease the Scheduled Castes and Backward Castes did not succeed. The

Badal government was accused of betraying the weaker sections by fixing the 300 watt limit,

whereas no limit was fixed in case of farmers” (Kumar 2003: 386).26

Such complex balancing through populism has detracted from investment promotion in

several ways. Populist schemes have meant that there is little money left for industrial

infrastructure. Punjab has the highest per capita consumption of electricity in the country and

26 Italics mine.

38

free electricity to groups has greatly strained the state’s weak generation capacity. Since

agricultural interests are politically powerful, the solution of various governments to the

electricity problem has been to enforce weekly mandatory cuts. Land is another major constraint

in attracting new investment to the state. The Punjab government has chosen not to get involved

in land acquisition for industrial purposes due to the fear of loss of agricultural support.

Populism and the financial strain it places on the state have meant that the state is also unable

to deliver on concessions promised in industrial policy statements. As a result, it enjoys low

credibility among business and this was made amply clear in interviews with investors in the

state. On being asked to identify the main strengths and constraints of investing in the state, one

investor suggested: “Frankly, why would you invest in Punjab in manufacturing if you are sane?

We have roots here. We are part of the SME [small and medium enterprise] sector and SME

guys cannot move. Large firms can. Hero has moved out of Punjab. Mittal has moved out. Only

the SME firms stay here.”27 Another businessman was equally unambiguous and commented

that: “The Punjab government’s interest in industrialization is zero. All the government is

interested in is working on its vote bank. The vote bank is agriculture... The main interest of the

government is in buying these votes.”28

Low credibility of the government is compounded by the fact that agricultural income in

India is typically not taxed. In Punjab, this has meant that the industrial and trading section,

which are mostly urban, are disproportionately taxed. However, they see very little benefit as a

considerable portion of the government’s finances ends up as subsidies to rural groups. Industry

in Punjab has contrasting demands from agricultural sections and is opposed to measures such as

free electricity to farmers, which they see as adversely affecting the state’s finances and,

subsequently, its ability to develop industrial infrastructure and deliver public services. Punjab

has, at times, levied local taxes such as octroi and entry taxes on inputs, which are paid by

industry. These taxes were virtually abolished in most other states due to their adverse effect on

industrial growth. Unable to tax agriculture in any form because of its political clout, the state

continues to impose levies on industry instead.

27 Interview, May 6, 2010. 28 Interview, April 20, 2010; Ludhiana.

39

5.2.4. Cross-cutting cleavages and party strategies: tracing the emergence of Punjab’s

wide coalitions

Punjab is relatively unique in that no single issue has dominated politics in the state for a

long period of time. The only exception was the period of Sikh militancy in the 1980s, when

religious differences dominated (Jodhka 2005). The underlying cleavage structure in Punjab is

such that parties cannot depend on a few social groups to win elections. Wallace points out that

accommodation is essential to political success in Punjab as “no one group is sufficiently large,

no issue is so encompassing, no sub-region so significant to provide the necessary support base”

(1989: 464). As such, parties have to build support across a range of social groups. Wide

coalitions are, therefore, a necessity in Punjab. Both SAD-BJP governments as well as Congress-

led ones have been backed by wide-right coalitions, comprising groups with dissimilar economic

interests as well as representation of business.

Caste, class, rural –urban divisions and region have divided Sikhs and Hindus internally

and such segmentation has found political expression. Compared with other other groups, Jat

Sikhs constitute a sizeable group in Punjab. The SAD’s leadership has been predominantly from

this group and Jat Sikhs also constitute the core of the party’s vote base. However, the support of

Jat Sikhs alone cannot ensure electoral majorities. Moreover, the SAD has not been able to

mobilize the Sikhs as a single group due to internal caste and other differences. For example,

Dalit Sikhs, who are largely landless agricultural laborers, do not identify with the landowning

Jat Sikhs. As a result, the Dalit Sikhs vote largely for the Congress rather than the SAD as they

perceive the latter as being dominated by Jat Sikhs.

These lines of conflict have acted as constraints on coalition construction, particularly for

the SAD. Knowing that Jat Sikhs are not large enough to ensure an electoral majority and

recognizing that its appeal is limited, the SAD has relied on formal electoral alliances with the

BJP. The complementary nature of core support – the SAD’s largely rural Sikh base and the

BJP’s urban Hindu base – has been electorally successful. In addition, the alliance with the BJP

also had symbolic value; allowing the SAD to throw of its “anti-national” tag and establish its

mainstream credentials as a party that believed in India’s parliamentary democracy (Jodhka

2005). Like SAD-BJP governments, the Congress too has been backed by wide-right coalitions.

Since Pratap Singh Kairon’s time in the 1950s, the Congress recognized that it was likely to be

40

outflanked by the rural and Sikh SAD as well as Hindu-right parties such as the Jan Sangh and

the BJP. As a result, the Congress since the 1950s has chosen to capture the middle ground in the

state and appeal to a cross-religious, cross-regional, cross-caste and cross-class base.

In sum, cross-cutting cleavage patterns in Punjab have meant that social groups tend to be

small. While entrepreneurial groups exist, they lack numerical strength. As a result, both parties

have been backed by wide-right coalitions when in power.

6. Alternative explanations

The explanation laid out in this paper stands in contrast with theories of investment location,

as outlined in section 2. Apart from these theories, factors highlighted in political economy

explanations of growth, public goods and policy-making such as colonial inheritance, ethnic

fragmentation, partisan preferences and ideology, political competition and leadership are also

relevant to a study of investment and offer additional hypotheses. In this section, I evaluate the

relevance of alternative theories in explaining patterns of investment across Indian states.

6.1.1. Colonial inheritance

Several scholars trace divergent patterns of development to the varying nature of colonial

institutions (e.g., Acemoglu et al. 2001; Engerman and Sokoloff 2000; La Porta et al. 1999). In

relation to India, this line of research highlights the impact of two different sets of colonial

institutions on regional development outcomes – nature of land tenure systems and direct vs.

indirect British rule. Banerjee and Iyer (2005) find that areas previously under the zamindari

system (a landlord-based system) exhibit significantly lower levels investments and productivity

in agriculture as well as inferior outcomes in health and education when compared with ryotwari

regions (where property rights were assigned to peasant cultivators).

Scholars have also found the degree of British rule has influenced development outcomes.

Between 1858, when the Crown formally took over administration from the East India Company

to independence in 1947, about one-third of the Indian population was under indirect rule of

more than 560 native princes and rulers (Metcalf and Metcalf 2001). Except for external affairs

and defense, which were controlled by the British, these “princely states” had considerable

autonomy in internal administration. Banerjee et al. (2005) as well as Iyer (2010) find that areas

41

previously under direct British control had lower access to public goods in the post-

independence period than areas under indirect rule of princely states.

Two broad hypotheses derived from these studies are relevant to investment outcomes – first,

economic performance is likely to be worse in zamindari areas and, second, regions previously

under princely states should fare better than those under direct British rule. However, these

hypotheses are insufficient in explaining patterns observed. For a start, there is temporal

variation in the levels of investment attracted by states and colonial institutions cannot explain

this aspect. The current boundaries of Indian states, which were drawn on a linguistic basis, do

not correspond to those of colonial institutions. The four case studies in the dissertation contain

within them areas that were under both direct and indirect rule. Yet outcomes vary significantly.

Similarly, the boundaries of two case study states – Bihar and Andhra Pradesh – include

significant zamindari areas. Despite this, the two states have performed very differently. Much of

Punjab was subject to neither zamindari nor ryotwari systems, pointing to the role of alternative

factors.

6.1.2. Partisan preferences and ideology

The political economy literature arising from advanced-industrial countries suggests that

parties on the left and right have distinct economic objectives and these preferences affect the

choice of economic strategies pursued by governments (e.g., Alvarez et al. 1991; Boix 1997a,

1997b, 1998; Garrett and Lange 1985). Studies analyzing market reforms in Latin America and

Eastern Europe also point to the role of ideology in affecting economic policy choice and

implementation (e.g., Murillo 2005, 2002; Murillo and Martinez-Gallardo 2007).

In contrast to advanced-industrial countries, the ideological positions of Indian parties tend to

be far more fluid. This is particularly true at the regional level where ideological moorings and

policy positions often fluctuate significantly and various examples point to this. Jenkins (1999),

Kohli (forthcoming) and Varshney (1999) all point out that there has been general agreement on

the basics of the economic policy agenda at the national level, irrespective of whether the center-

left Congress or right-wing BJP have been in power. As the Andhra Pradesh case in my

dissertation outlines, the TDP under N.T. Rama Rao openly opposed economic liberalization in

its 1994 electoral campaign. Yet, Chandrababu Naidu, who replaced Rao as TDP party president

42

and chief minister that year, shifted the TDP’s economic position firmly to the right on coming

to power (Kennedy 2004). A particularly well-publicized case of ideological ambiguity was the

attempted re-invention of the Communist Party of India - Marxist (CPI-M) in West Bengal as

business-friendly since the mid-1990s. Commenting on the West Bengal case, the Economist

(2006) pointed out: “India's two Communist parties are more powerful and more contradictory…

Traditional left-wing policies such as land reform have now been supplemented under the state's

[West Bengal’s] chief minister, Buddhadeb Bhattacharjee, by a keen search for foreign

investment, and support for privatization – ideas that the party shuns at a national level.”29 While

the CPI (M) was reinventing itself as a business-friendly government in West Bengal, the same

was not true in Kerala where it has also led the government.

Parties also adopt contradictory positions at different times on the same issue. The cases of

labor reform and foreign investment provide excellent examples. At the federal level, both the

BJP and the Congress have attempted to implement market-friendly labor reforms when in

power but have blocked these very same measures when in opposition (Jenkins 2004; Venkata

Ratnam 2004). As an opposition party in the early 1990s, the BJP opposed foreign investment

openly, advocating a national self-sufficiency (“swadeshi”) agenda, but actively liberalized the

FDI regime when in power between 1999 and 2004.

Finally one other distinction with advanced-industrial countries and Latin America needs to

be noted. A formal link between leftist parties and labor unions forms part of the partisanship

explanation in several studies (e.g., Alvarez et al. 1991; Murillo 2005). India offers a very

different environment with 92 per cent of the total workforce employed by the unorganized

sector (Sengupta 2007). Organized labor is also highly fragmented – estimates suggest that there

are over 50,000 trade unions in India, which are split between 10 major trade union federations

affiliated to different political parties ranging from the communist parties on the left to the BJP

on the right (Teitelbaum 2006).

Rather than a focus on partisan preferences along a standard left-right dimension, the

explanation in this paper suggests that policies and measures undertaken by subnational

governments is influenced by the nature of electoral coalitions. The fluidity and the variation in

29 Italics mine.

43

partisan economic positions across states can, in turn, be explained by the fact that these

coalitions differ across states as well as within states over time.

6.1.3. Political competition

Dimensions of political competition have been linked to both policy adoption as well as

economic performance (e.g., Besley et al. 2010; Bueno de Mesquita et al. 2001; Chhibber and

Nooruddin 2004; Frye 2002; Murillo and Martinez-Gallardo 2007; Pinto and Timmons 2005).

While this dissertation broadly suggests the nature and trajectory of political competition matters

for investment outcomes, it differs from these studies in terms of the mechanisms emphasized.

These studies offer varied explanations on the effects of political competition. However, one

hypothesis can be adapted to investment patterns. Bueno de Mesquita et al. (2001) argue that

regimes characterized by smaller winning coalitions are more likely to deliver private goods

while those backed by larger winning coalitions are more likely to provide public goods.

Building on this insight, Chhibber and Nooruddin (2004) find that there is greater provision of

public goods under two-party competition in India than multi-party competition. If we adapt this

hypothesis and treat investment outcomes as a public good, we might similarly expect an inverse

relationship between investment and party system fragmentation. However, there is no evidence

of a significant relationship between fragmentation and investment outcomes in either direction.

The case studies also point to variation in investment outcomes within states that have relatively

similar levels of party fragmentation. Gujarat and Andhra Pradesh are both two-party states and

have differed. Punjab is bipolar but performs considerably worse than these states. Temporal

variation has also occurred when party system fragmentation remained broadly the same.

6.1.4. Ethnic fragmentation

Scholars have argued that ethnic heterogeneity has a negative impact on various outcomes

including growth, public goods provision and government performance (e.g., Alesina et al. 1999;

Alesina and La Ferrara 2005; Easterly and Levine 1997; Miguel and Gugerty 2005; La Porta et

al. 1999). However, ethnic fragmentation falls short in predicting investment patterns. For a start

ethnic fragmentation, which is relatively constant, cannot explain temporal variation within

states. In terms of the case studies, Gujarat, AP and Bihar perform very differently in the

competition for investment but have relatively similar ELFs (0.199, 0.201 and 0.281

44

respectively).30 Finally, explanations of ethnic heterogeneity typically rely on the ethno-

linguistic fractionalization (ELF) index as a measure of fragmentations. As authors such as

Posner (2004a) point out, the index suffers from several problems and may bias conclusions.

While ethnicity plays a role in my paper, I suggest that it is not fragmentation per se that matters.

I argue that underlying cleavages affect party strategies related to mobilization and political

agency also has to be taken into account in coalition-construction.

6.1.5. Leadership

In interviews during fieldwork, businesspersons often cited political leadership as one of the

strengths or weaknesses of investing in particular states. Chief ministers such as Narendra Modi

in Gujarat, Chandrababu Naidu in AP, S.M. Krishna in Karnataka and Naveen Patnaik in Orissa

and Nitish Kumar in Bihar have also been celebrated in the media as being responsible for

economic transformations in their states. The Rudolphs (2001) too highlight the role of

individual agency. While I do not dismiss the claim that leadership matters, it suggests that

leaders need to be viewed as an intermediate part of the chain that links coalitions to investment

outcomes. Arguments that focus solely on leadership neglect the question of where and how

preferences and constraints on individual leaders originate. It is in this context that the role

played by electoral coalitions is significant. In and of itself, strength and tenure of leadership has

neither been necessary nor sufficient in creating favorable investment climates in India as

examples of leaders such as Mayawati in Uttar Pradesh or Laloo Yadav in Bihar suggest. Sinha

(2004) points out how Gujarat performed exceedingly well after despite having considerable

seeing seven different chief ministers in the first decade after liberalization. Thus, investor-

friendly agendas of certain chief ministers need to be viewed as products of broader coalition

interests rather than merely individual predilections.

7. Conclusion

From the point of view of an extensive literature on redistribution, which predicts that high

growth in poor democracies is unlikely, India’s rapid growth over the last two decades is

puzzling. In contrast to such expectations, India’s economic transformation has taken place in the

midst of high levels of political competition in a largely poor and rural electorate. Driven by

30 ELFs calculated here are based on data on religion from the Census of India (2001).

45

India’s experience, this paper aims to understand the political conditions conducive to high

growth in poor democracies.

Examining a specific empirical puzzle related to investment – a key driver of growth – across

Indian states, this paper argues certain configurations of electoral coalitions allow policymakers

to prioritize growth-related concerns such as investment more than others. In particular, narrow-

right coalitions, characterized by core groups with similar economically-advanced profiles as

well as substantial representation of business interests, are most conducive to the formulation and

implementation of an investor-friendly agenda. Redistributive pressures generated by such

coalitions are less intense and policymakers can prioritize growth-related issues over other

competing concerns. As such, governments backed by narrow-right coalitions are more likely to

formulate and implement a pro-business agenda than those supported by other types of electoral

coalitions. In turn, investors react more favorably to this policy framework.

How do such coalitions emerge in the midst of poor electorates? When identity forms the

dominant mode of political mobilization, pre-existing social cleavage structures play a major role

in influencing party strategies of coalition construction. In such cases, certain cleavage

configurations can favor the emergence of narrow-right coalitions in poor democracies. The

emergence of these coalitions is predicated on identity-based mobilization and is unlikely to

occur if class was the main axis of politics in poor countries. In Indian states, this paper finds that

narrow-right coalitions are most likely to emerge under “dominant caste” patterns, which involve

an overlap between numerical strength of social groups and economic resource control. This

underlying correlation between size and resource control in India’s competitive first-past-the-

post system has allowed parties to construct electoral majorities with narrow-right coalitions.

One important concern can be directed against the core argument in this paper and I end by

briefly addressing this issue. The explanation laid out here suggests a trade-off between growth-

related goals and redistribution in poor democracies. There are several reasons why this dialectic

is likely to be valid in developing democracies. In the context of competition for investment,

governments need to create a favorable policy environment to attract capital to their jurisdictions.

For poor countries, this typically involves offering incentives and building specialized

infrastructure to attract capital. Given limited resources available to poor countries, such choices

involve significant opportunity costs. The trade-off is also likely to be exacerbated if the benefits

46

of growth are not distributed evenly. In addition, a time-inconsistency problem may also arise –

the benefits of growth typically accrue in the long-run while costs entailed by pro-business

policies occur in the short-term. This often results in considerable political contestation.31

Ultimately, the trade-off between growth and redistribution is an empirical question. In

Indian states, considerable evidence points to a divergence between the two aims. Despite its

recent growth success, India remains largely poor and overwhelmingly rural (over 72 per cent of

the population lives in rural areas). In addition, 92 per cent of the total workforce is in the

unorganized sector (Sengupta 2007). In contrast to these employment patterns, economic growth

in India in the post-1991 period has been driven primarily by capital-intensive industries and the

service sector (Kochhar et al. 2006; Subramanian 2008). Services accounted for almost 65 per

cent of the country’s GDP in 2009-10 while agriculture and allied services accounted for 14.6

per cent.32 This trend – of services constituting the greatest share of GDP – is prevalent in most

major Indian states. Employment generation in the organized sector has also been extremely

limited and the jobs that have been created in the formal sector have been of poor quality; they

are typically on a contractual basis and offer no social protection (e.g., Anant et al. 2006; Nagaraj

2006). In short, a variety of trends point to a skewed distribution of benefits after market reforms

in India. Even the current national government officially acknowledges that growth has not been

inclusive after 1991 (e.g., India 2008). This lack of inclusiveness, thus, forms the basis of

tensions between growth-oriented and redistributive policies in India.

In the context of growing democratization, balancing the imperatives of growth and

redistribution with limited resources is likely to be a legitimate concern for several developing

countries. In such contexts, purely class-based political mobilization is likely to result in a focus

on redistributive goals. Policies such as investment are unlikely to be prioritized. In contrast, as

this paper attempts to demonstrate, identity politics can unexpectedly lead to the emergence of

electoral coalitions that are conducive to growth-friendly goals in poor democracies.

31 In India, land is one such area that has resulted in significant political contestation. This is discussed in chapter 2 of my dissertation. 32 Calculated from RBI (2010), Table 3: Components of Gross Domestic Product (At Factor Cost)

47

Appendix – Figures and tables

Figure 1: The argument

48

Table 1: Total Investment across states – 1991 to 2010

State Total Investment (In Million

Rs.)

Share of total investment

value received nationally (%)

Total number of investment

proposals

Share of total number of proposals received

nationally (%)

Per Capita Total

Investment (In Rs.)

Chhattisgarh 10,456,450 13.72 2,798.00 3.15 501,894 Orissa 10,444,630 13.7 1,650.00 1.86 283,783 Gujarat 8,979,100 11.78 10,333.00 11.65 177,204

Maharashtra 7,434,670 9.75 15,769.00 17.77 76,742 Andhra Pradesh 6,896,070 0.05 6,932.00 7.81 90,488

Karnataka 5,992,490 7.86 3,897.00 4.39 113,385 Madhya Pradesh 5,752,810 7.55 3,548.00 4.00 95,327

Jharkhand 4,307,600 5.65 1,043.00 1.18 159,860 West Bengal 3,384,520 4.44 4,852.00 5.47 42,214 Tamil Nadu 3,139,370 4.12 7,910.00 8.92 50,306

Uttar Pradesh 2,155,450 2.83 7,201.00 8.12 12,969 Rajasthan 1,352,170 1.77 3,512.00 3.96 23,929

Bihar 1,082,330 1.42 406.00 0.46 13,040 Punjab 1,075,300 1.41 3,349.00 3.77 44,144

Haryana 911,320 1.2 4,391.00 4.95 43,099 Uttarkhand 605,240 0.79 2,068.00 2.33 71,297

Himachal Pradesh 328,080 0.43 996.00 1.12 53,978 Assam 312,050 0.41 613.00 0.69 11,707 Kerala 137,660 0.18 702.00 0.79 4,323

Goa 134,010 0.18 770.00 0.87 99,414 *Chhattisgarh, Jharkhand and Uttarakhand were formed in 2000. They were part of Madhya Pradesh, Bihar and Uttar Pradesh respectively until 1999. Source: Calculations based on data from the Secretariat of Industrial Assistance (Ministry of Commerce and Industry, Government of India); SIA statistics (January 2011) available at http://dipp.nic.in

49

Source: Calculations based on data from the Secretariat of Industrial Assistance (Ministry of Commerce and Industry, Government of India); SIA statistics (January 2011) available at http://dipp.nic.in

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Annu

al In

vest

men

t (In

mill

ion

Rs.)

Year

Figure 3: Annual Investment in Select High and Middle Income States

AP GUJ MAH TN WB KAR PUN HAR

50

Regression results used in Figure 4

VARIABLES State Per Capita Income

0.217 (0.368)

Road Density -0.201 (0.139)

Literacy Rate 1,347 (2,886)

GSDP 961.8** (375.7)

Constant -10,268* (5,054) Observations 20 R-squared 0.375

Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

AP

ASS BIH

CHH

DELGOA

GUJ

HAR

HP

JHA

KAR

KER

MAH

MP

ORI

PUNRAJ

TN UPWB

R-squared = 0.3745

010

0020

0030

0040

0050

00

Cum

ulat

ive In

vestm

ent 1

991-

2007

(in

billio

n ru

pees

)

0 1000 2000 3000 4000

Fitted values

Actual Values Fitted values

Figure 4: Actual vs. Predicted Values of Cumulative Investment

51

Figure 5: Classification of coalitions

Business incorporation

Socio-economic profile

Minimal Substantial

Similar/confined Narrow-left Narrow-right

Diverse Wide-left Wide-right

Table 2: Policy variation across case study states33

Gujarat Andhra Pradesh

Punjab Bihar

Overall approach More business-friendly than elsewhere. Adopted pro-business policies earlier.

More pro-business at some times than others. Commitment slowed since 2004.

Slow to react to market reforms and lags behind many other states.

Virtually no initiatives between 1990 and 2005. Considerably more pro-active since 2005.

Infrastructure High priority. GID Act in 1999. GIDB, GMB and GIDC very active. Surplus electricity generation.

AP Infrastructure Act in 2001 & INCAP in 2005. APIIC active. Electricity reforms but shortfall.

Strong initial base. Few efforts to supplement. PID Act and PIDB in 2002. Major electricity shortfall.

Poor base. Major thrust on roads and bridges after 2005. Electricity remains a major constraint.

Incentives and subsidies Reduced dependence over time. Offers capital investment subsidies, commercial tax concessions, stamp duty and technology reimbursements.

Aggressive in offering concessions during 1995- 2004. Offers concessions on land transfer, stamp duty and capital investments.

Poor fiscal situation has meant few concessions. State not able to provide subsidies promised in policy statements.

Post-2005, state has been pro-active in offering capital investment subsidies, VAT reimbursements, concessions on land transfer and stamp duty.

Regulatory environment Single Window Act in 2000 and Indextb since 1978. Self-certification in many areas since 1991.

E-governance since 1994. Single Window Clearance Act in 2002. Self-certification in many areas since 1991.

Slow to ease system. Punjab Industrial Facilitation Act in 2005.

Some self-certification and single window measures in place from 2006.

Labor laws/environment

Low mandays lost. Labor law flexibility in SEZs and IT sector.

Low mandays lost. Amended Contract Labor Act. Labor law flexibility in SEZs and IT.

Low mandays lost. Labor law flexibility in SEZs and IT.

Few formal steps to reform labor laws. Flexibility for IT sector.

Land acquisition Pro-active, particularly for large investments. Land banks created through reform period.

APIIC active in acquiring land and building land banks. Involvement contentious.

Land is major constraint. State reluctant to acquire land.

Provisions for creating land banks in 2006 policy.

Special Economic Zones (SEZs)

SEZ policy in 2004. 60 approved (till 2010).

SEZ policy in 2002. 110 approvals (till 2010)

15 approvals (till 2010). No SEZ approvals till date.

Institutional framework for industrialization

Business-friendly bureaucracy. Indextb, GIDC, GIDB, GIIC, GFC, GMB all active.

Partially effective. APIIC is pro-active but APIDC and APSFC are defunct.

PSIDC defunct and bureaucracy generally apathetic.

Deinstitutionalization prior to 2005. Emphasis after 2005 in rebuilding institutional framework.

Branding, promotion and information activities

Major efforts. Vibrant Gujarat investor summits and Indextb.

Active 1994-2004. Not as institutionalized as Gujarat.

Few efforts at promotion and information dissemination.

Post-2005 thrust on promotion to domestic investors and diaspora.

33 A more detailed discussion of policies across Indian states is included in chapter 2 of my dissertation.

52

Table 3: Social Bases of the BJP and Congress in Gujarat (Percentage vote of respondents for BJP and Congress by caste/community)

Election

1995 1996 1998 1999 2002 2004

BJP INC BJP INC BJP INC BJP INC BJP INC BJP INC

Upper Castes 67 20 76 18 77 13 77 16 79 16 67 26

OBCs 38 38 65 30 57 28 38 61 59 38 40 55

Scheduled Castes 17 61 61 35 47 45 33 64 27 67 24 67

Scheduled Tribes 29 59 34 55 43 46 33 67 34 49 48 46

Muslims 7 47 33 65 38 62 10 90 10 69 20 60 Source: Data from Shah (2007), table 6.4, p.173. Except 1996 is based on post-poll surveys of voters in Gujarat in assembly and parliamentary elections conducted by CSDS (New Delhi). 1996 survey was conducted by CSS (Surat).

Table 4a: Social Bases of the Congress and BJP-SAD in Punjab in 2002 (Percentage vote of respondents for BJP and Congress by caste/community)

INC-CPI* SAD-BJP

Hindu upper caste 56 22

Hindu OBC 52 12

Hindu Dalit (SC) 49 9

Jat Sikh 23 52

Khatri Sikh 25 61

Sikh OBC 39 34

Dalit Sikh 40 30

*The Communist Party of India (CPI) was an alliance partner of the Congress in 2002. Source: Kumar and Kumar (2002). Data based on post-poll survey of the 2002 assembly elections conducted by CSDS (New Delhi).

Table 4b: Social Bases of the Congress and BJP-SAD in Punjab in 2009

INC SAD-BJP

Hindu Upper Caste 58 36

Hindu OBC 62 32

Dalits 60 16

Jat Sikhs 37 54

Other Sikhs 32 60

Source: Kumar and Sekhon(2009). Data based on post-poll survey of the 2009 Lok Sabha elections conducted by CSDS (New Delhi).

53

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