The Budget, Government Style and the Sustainability of Economic Reform in India

Abstract

The sustainability of liberal market reforms under successive regimes is a key issue in several countries. This paper examines the significance of the Indian 1998 Budget (a major signal for the direction of economic policy, and the first one to be presented by the new government) for reform sustainability. It argues that this Budget embodies an important shift in institutional approach, which constitutes a reversal of the neo-liberal reform agenda. Its main significance lies in the attempt to change the 'government style', i.e., the manner of engagement between the government and economic actors in industry and trade. The paper also discusses briefly the relationship between government style and the effectiveness of policies. Why did the liberal rule-based reform falter to make way for relation-based revisionism? The paper seeks to answer this question through a diagrammatic model, which analyzes the interaction of political and economic determinants of sustainability. It argues in favor of strengthening the institutional capacity of the state to implement even liberal market reforms. The model shows that in a democratic context: (1) Institutional mechanisms for consensus formation in support of reforms can play a pivotal role in sustaining reform (2) The greater the gap between expected and actual response of domestic and foreign private investment to liberalization, the greater the role of institutional capacity in assuring reform sustainability. The paper concludes that a country such as India cannot afford to neglect strengthening institutional capacity in order to sustain reform.