State, Ideas and Economic Reform in India

This paper argues that the state is an important institution for initiating economic reforms in India. Ideas held within the state are especially important. When the state reposed faith in a closed economy model with stringent government control, it could not be forced to shift to a new path during the balance of payments crisis in 1966, despite considerable foreign pressure. On the other hand, when the Indian state became aware of the pathologies of persisting with import substitution through the 1980s, it used the balance of payments crisis in 1991 to re-orient India’s economic paradigm. India did not change course because of the balance of payments crisis in 1991. Nor did India embrace globalisation and deregulation because of entrepreneurs in 1991. In fact, the powerful corporates were opposed to substantial economic deregulation in 1991. This paper argues that substantial economic change in India often resembles a tipping point.