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Liberalisation and business

lobbying in India
a
Stanley A. Kochanek
a
Pennsylvania State University
Published online: 25 Mar 2008.

To cite this article: Stanley A. Kochanek (1996) Liberalisation and business

lobbying in India, The Journal of Commonwealth & Comparative Politics, 34:3,
155-173, DOI: 10.1080/14662049608447729

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 Liberalisation and Business
Lobbying in India

STANLEY A. KOCHANEK
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The current trend toward economic liberalisation is having a profound effect

on business-government relations in the Third World.1 Patterns of public
policy play a major role in shaping interest group behaviour, determining
channels of access and conditioning the style of interest articulation. Interest
groups not only attempt to shape public policy but are themselves shaped by
the very public policy they seek to influence.2 Following the parliamentary
elections of 1991 in India, the new Congress-led government of Prime
Minister P.V. Narasimha Rao was forced to make a dramatic break with the
country's past economic policies in a desperate effort to ward off
bankruptcy.3 Encouraged by the International Monetary Fund (IMF), the
government adopted a series of economic reforms designed to increase
domestic competition, reduce direct government control of the economy,
rely more extensively on market forces, open up the economy to global
competition and foreign investment and prepare Indian business to
participate in the global economy. These dramatic changes in economic
policy have fundamentally altered India's post-independence model of
development and have had an especially dramatic effect on India's diverse
business community. The reforms have significantly modified business
strategies, lobbying styles and relationships to government.
In the years following independence, India created one of the most
comprehensively controlled and regulated economies in the non-communist
world. Its development model was based on a system of centralised
planning, a mixed economy dominated by a hegemonic public sector and a
private sector in which all basic management decisions involving
investment, production, technology, location, prices, imports, exports and
foreign capital were controlled and regulated by the state. In theory, the
model was designed to ensure that the economy would grow rapidly in a
planned and self-reliant direction; that the private sector would invest only
in high priority industries approved by the government; that monopoly and

Stanley A. Kochanek, Pennsylvania State University.

Journal of Commonwealth & Comparative Politics, Vol.34, No.3 (November 1996), pp. 155-173
PUBLISHED BY FRANK CASS, LONDON
 156 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

concentration of economic power would be forestalled; that the state would

come to control the commanding heights of the economy; and that steep tax
rates for individuals and corporations would provide the resources for the
plan, check the conspicuous consumption of the rich and create a society
based on social justice. In practice, however, the approach resulted in slow
rates of growth, massive corruption and an economy of shortages.
The creation and design of India's system of comprehensive control and
regulation of private sector economic activity arose from a series of
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strategic choices made during the early years of the post-independence

period from 1947 to 1951. These choices were based on a set of major
political compromises which attempted to blend the experience of wartime
planning and controls, domestic pressures for a policy of economic
nationalism and the liberal, Gandhian and socialist ideological cross-
currents which existed within the nationalist movement. The policies which
emerged from these compromises established a consensus in support of an
Indian model of development based on a mixed economy in which the
private sector would be controlled, regulated and protected by the state, and
foreign capital would be permitted under highly restricted circumstances.
Once created, the system grew incrementally from 1951 to 1969 as the
result of a steady cumulative process of administrative development and
elaboration and was reinforced and supplemented by a wave of populist
reform from 1969 to 1973, which added anti-monopoly legislation and
tightened control over foreign capital.4
Once fully developed and matured, however, the regulatory system began
to manifest a number of life-cycle rigidities in the 1970s, including a lack of
speed in decision making, a lack of innovation and a lack of flexibility. These
rigidities combined to have a negative effect on private sector industrial
growth and competitiveness. The period from 1973 to 1991, therefore, was
marked by a series of efforts to reduce the negative impact of regulatory
policy while at the same time keeping the basic system in place. The result
was a continuing process of liberalisation designed to reduce delay, promote
production and encourage exports. The policy of liberalisation, however, was
never really coherent or based on a comprehensive evaluation of the
regulatory system but was simply a series of ad hoc alterations or
'readjustments'. The objective was to accelerate production while leaving the
fundamental outlines of the system untouched.5 No real change in the basic
policy structure was made until the July 1991 reforms of the Rao government.

BUSINESS AND COLLECTIVE ACTION

In response to the development policy of centralised planning and
regulation of the private sector, the Indian business community developed a
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 157

dual approach to dealing with the Government of India. At the collective

level business drew upon the wide array of well-organised and well-
financed business associations that had grown up in the years preceding
independence to deal with the British colonial government. These
organisations included chambers of commerce, trade and industry
associations, employers' associations and two peak associations, the
Federation of Indian Chambers of Commerce and Industry (FICCI), which
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represented indigenous capital, and the Associated Chambers of Commerce

and Industry (Assocham), which represented foreign capital. Together these
associations constituted the oldest, most organised and most politically
autonomous structures of interest articulation in India capable of sustained
collective action.6
At the individual level, the Indian business elite developed a highly
sophisticated mode of discrete lobbying designed to achieve particularistic
benefits from the new permit, licence, quota raj. Each major business house
established the equivalent of an industrial embassy in New Delhi designed
to act as a listening post, liaison office and lobbying agency to deal with
political and bureaucratic decision makers.7 Because the leadership of
specialised business associations was provided by the leaders of India's top
75 business houses, the two levels of lobbying were closely linked to each
other and capable of co-ordinated action.
While industrial embassies proved to be effective instruments in dealing
with the new regulatory regimen, the ability of business associations to
influence basic economic and development policy was severely limited due
to the relative autonomy of the state, the low status of the Indian business
community and the strong belief of political and bureaucratic decision
makers in the efficacy of state intervention in the economy. According to
M.S. Patwardhan, former President of the Bombay Chamber of Commerce
and Industry,
chambers in India are hardly successful in influencing the direction of
major government policy relating to industry, industrial licensing,
monopolies legislation, taxation, pricing, industrial relations etc.
Their efforts are largely reactive rather than proactive. There is little
rapport and mutual confidence between the government and the
chambers with the result that their interaction at annual general
meetings, seminars etc. is either ritualistic with parties talking at each
other from entrenched positions in words which are highly critical of
each other or altogether emollient with the real problems swept under
the carpet.*
Although Indian business associations were unable to influence major
legislation or government economic policy, they were able to have a more
 158 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

limited impact on the detailed implementation of regulatory and distributive

policies. Government control and regulation of the private sector placed
vast discretionary powers in the hands of political and bureaucratic
regulators affecting every detail of private sector operations. Almost the
entire time of business association secretariats, therefore, was consumed in
preparing representations to government demanding changes and
modifications in regulatory policies. The annual reports of Indian business
associations are replete with copies of letters, memorandums and petitions
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outlining the problems encountered by business in attempting to carry out

day to day activities and demanding alteration or refinement of
administrative policies, procedural change or removal of contradictions and
anomalies inherent in the complex and overlapping system regulation.
Specific demands include such things as the modification of working capital
norms set by the Reserve Bank, changes in company law rules, alteration of
MRTP and FERA limits, changes in import policies, removal of tax
anomalies, withdrawal of corporate tax surcharges, higher depreciation
schedules and so on." The success of these demands was reflected in the
large number of notes and modifications issued almost daily by the
government reversing or modifying existing policies. For example, India's
tax system became extremely complex due to a flood of tax notifications
that provided special benefits to individuals and industries. As a result a
single item might carry five different duties for different purposes in
different places.10
Although business was at times successful in securing minor alterations
in regulatory policy, major changes in those policies were brought about not
by business lobbying but by internal and external factors that were beyond
the control of business. The liberalisation policies of the late 1970s, for
example, were largely due to the rise of Sanjay Gandhi as a political force.
Sanjay had developed strong anti-bureaucratic attitudes in the process of
trying to build a small car for the Indian market and therefore favoured a
policy of deregulation. Sanjay's pressure for change was reinforced by the
1973 and 1979 oil shocks and the 1981 conditionalities imposed by the
International Monetary Fund as part of a major restructuring loan." The
same was true of the fundamental alteration of the Indian development
model in July 1991, which was the result of the near bankruptcy of the state
and the anticipated IMF demands that would accompany a new loan.
In short, the impact of the collective action by the Indian business
community through its associations on government policy until 1991 was
very limited. Peak associations representing business did not enjoy a high
status and there was an absence of mutual co-operation, trust and respect
between business and government. Government viewed business associations
as grievance bodies, not partners.
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 159

BUSINESS HOUSES AND LOBBYING

Although the impact of collective action on government policy was limited,

the regulatory and distributive character of the policy made the role of
individual influence, connections and particularistic demands by business
houses the dominant factor in business-government relations. Businessmen
in India were not without influence and power. They commanded large
resources in the form of money, jobs and productive assets and they used
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these resources very effectively in the distributive realm of regulatory

politics. The business-Congress relationship was multi-layered and
complex. Despite the strong anti-business public rhetoric of politicians,
members of the business elite enjoyed close and durable personal
relationships with individual Congress politicians and ministers. These
relationships had been developed during the freedom struggle when Indian
businessmen supplied Congress leaders with money, hospitality and
political support and formed the basis of a well-established system of
particularistic lobbying designed to secure individual benefits.12
The system of particularistic lobbying grew gradually as the regulatory
framework matured and became increasingly complex. The development of
the system passed through three distinct phases from 1951 to 1991. The first
phase covered the period from 1951 to 1969 and marked the golden age of
private sector development in India. The second phase, from 1969 to 1979,
was characterised as the period of briefcase politics based on a mutual
exchange of benefits among an iron triangle of businessmen, bureaucrats
and politicians. The third phase entailed an increasing externalisation of
corruption in the 1980s and 1990s, based on defence and infrastructure
contracting with foreign suppliers.
Although business was initially frightened by Nehru's socialist rhetoric
and talk of nationalisation, the unlimited opportunities for industrial
expansion in the 1950s and early 1960s resulted in business accommodation
with the Nehru government. The new regulatory order proved to be more
promotional than regulatory and opportunities for private sector investment
expanded rapidly. Government actively encouraged business houses to
undertake projects to meet plan targets and business houses created
industrial embassies to push projects though the regulatory clearance
process. Gradually business learned how to make the system work in its
favour and began to corner industrial licences and secure monopoly control
of various products."
During the first decade and a half of planning Indian businessmen were
principally concerned with the expansion and growth of their own business
empires and the protection of their individual interests. Each business house
used the influence it acquired through patronage and individual
 160 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

contributions to Congress party leaders to obtain benefits for its own family
group. Although some collective benefits might incidentally accrue from
policy changes, industrial embassies were designed primarily to secure
licences, permits or quotas for individual business groups.

BRIEFCASE POLITICS: 1969 TO 1979

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The pattern of business-government relations established by India's

industrial embassies during the first two decades following independence
underwent dramatic changes in the 1970s. The long-standing, intimate
relationship between India's elite business families and Congress party
leaders established during the struggle for independence was shattered as a
result of the election of Indira Gandhi as prime minister and leader of the
Congress in 1966 and the split in the party in 1969. Indira Gandhi's rise to
power was accompanied by a shift to the left and a populist assault on the
Indian business community. In an effort to undercut the Congress old
guard's links with business and develop a populist appeal designed to attract
the votes of the poor, Indira Gandhi nationalised private sector banks,
enacted a whole array of new monopoly and regulatory legislation and
introduced a ban on company contributions to political parties. These
actions not only weakened her ties with business but also left her Congress
(I) party coffers empty and eliminated the only legal mechanism for Indian
business to contribute to political parties. As a result, noted a government
committee, 'black money' became the main source of funds for political
parties.14 Black money or 'number two money' was accumulated by
business via tax evasion, black-market operations and a whole array of
mechanisms used to bypass and profit from government controls.
As a result of these changes, the period following the Congress split of
1969 was characterised by a member of the Indian Parliament as the era of
'briefcase politics',13 a phrase used to describe the transfer of vast amounts
of black money in the form of cash into the electoral coffers of the Congress
(I) party. Prices for regulatory decisions involving permits, licences and
quotas were assessed by Congress (I) ministers in terms of the number of
briefcases required. Each briefcase held an estimated one million rupees.
Initially, prices were set as a fixed fee but later they were levied as a
percentage of the benefits.16 The politicalisation of the regulatory system
was described by S.S. Marathi, former Industries Secretary, as follows:
After the Congress split in 1969 there was a marked increase in the
number of decisions or clearances which were obtained by
approaching the political level of decision making. In fact, it may not
be a mere coincidence that there was a marked increase in the time
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 161

taken for clearing applications ... and the greater frequency with
which these approvals were expedited by approaching the decision
makers at the political level.17
The new strategy of using the regulatory system to raise large sums of
money for election expenses for the Congress (I) was further developed and
expanded by L.N. Mishra, Indira Gandhi's Minister of Foreign Trade. It was
Mishra who was credited with creation of the politics of big money by
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combining the enormous leverage provided by the permit, licence, quota raj
with the coercive powers of the state. In the words of one close observer,
Often representatives of trade and industry were called up by him to
Delhi and asked to produce specified amounts. Those who declined
were threatened with possible raids by people of the Revenue
Intelligence and Enforcement Directorate, which were now operating
under the Cabinet Secretariat. In Bombay financial circles stories
started circulating of the amounts secured by the Foreign Trade Minister
under such threats. Others who came forward willingly with whatever
was asked for, received concessions, beyond their imagination, to
expand their business and amass further resources. A number of new
stars were born on the industrial firmament of India during this time.18
'Donations', according to Mrs Gandhi's biographer, Krishan Bhatia, had
become more like extortions.1'' 'As elections grew more and more costly,
and as the role of money in gathering votes became more important', noted
another observer, 'the government came more and more to resemble a
bargain basement, where a rise in sugar prices, and increase in export
subsidies, and an import licence for a scarce material, would be exchanged
for cash donations to the party'.20 A joke attributed to T.A. Pai, a former
minister in Mrs Gandhi's government which reflected the atmosphere of the
time noted: 'If a peon accepted money, it was called bakshish; if a clerk took
it, it was mamool (custom); if an officer took it, it became a bribe; and if a
minister took it, it was called party funds.'21
In this new atmosphere, businessmen willing to be co-operative had
little difficulty in securing appropriate benefits. As Herdeck and Piramal
have observed,
Newer industrialists who got their start in the 1960s and 1970s might
have had a more instinctive appreciation for the possibilities of
growth under a more regulated system. They grew quickly while older
industrial families resisted the "new politics" which required business
to take a permanent genuflected posture before politicians.22
Cultivating the right connections almost ensured success in an economy
 162 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

where government decisions counted as much as entrepreneurial skill.

Among the older industrial families that resisted the new politics were
those located in South India. For South Indian business the 1960s were seen as
a golden age. Business in the south grew rapidly and the region increasingly
became the Detroit of India and a major textile centre. South Indian business
houses, however, never really emerged as giants as did business houses in
Calcutta and Bombay. South Indian business, especially the Chettiars, were
much more conservative than their Marwari, Gujarati and Parsi counterparts.
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They refused to invest outside their region, had a low tolerance for risk and
were very reluctant to borrow from government financial institutions out of
fear of losing family control. Their growth in the 1960s was the result of strong
encouragement from a state Congress government determined to develop local
industry and the excellent connections they enjoyed with powerful Tamil
Congress ministers in New Delhi."
The development of South Indian business, however, slowed
significantly in the 1970s as the local political climate turned hostile under
the Dravida Munnetra Kazhagam (DMK) government, and business lost its
key Congress contacts in New Delhi following the split in the Congress.
South Indian business was reluctant to become involved in the art of
wheeling and dealing which became essential in the 1970s. They saw the
1970s 'as the dawning of an era of "fixing and bribing'"24 and refused to
engage in the required 'lobbying and manoeuvring' which became essential
to success. They, therefore, found it difficult to manage the new political
environment needed to secure projects and sanctions. 'Big projects
necessarily mean big pay offs'T they noted, and they refused to engage in
such practices.25

THE EXTERNALISATION OF CORRUPTION

While the decade from 1969 to 1979 was characterised as the era of
'briefcase polities', the 1980s and early 1990s became marked by the
externalisation of corruption in India. Increasingly, by the late 1970s and
early 1980s the exchange nexus that applied to industrial licensing, MRTP
clearances, import/export controls and the entire regulatory system spread
to large public sector civilian projects, military contracts and infrastructure
contracts with foreign companies. According to India Today,
it was a well-known fact in political circles that the Congress strategy
since Sanjay Gandhi's time has been to eliminate the need for going
hat in hand to Indian businessmen for donations to the party purse ...
much of the money now supposedly comes from foreign companies
bidding for large contracts in India.26
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 163

The system had matured to the point that Rajiv Gandhi himself sadly
proclaimed to the 100th anniversary celebration of the Congress party in
December 1985 that 'corruption is not only tolerated but even regarded as
the hallmark of our leadership'.27 Rajiv promised to reform the system and
was dubbed by many as Mr Clean.
Unfortunately, Rajiv's Mr Clean image did not last very long. In early
1987 his Congress I-led government, was rocked by a series of major
scandals involving alleged favouritism to Congress business allies, illegal
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secret overseas bank accounts held by Congress supporters and huge

kickbacks on government defence contracts involving a Rs. 4.5 billion
submarine deal with the West German company Howaldt Deutsche Werke
(HDW) and the Rs. 17.05 billion Bofors scandal involving the purchase of
Swedish artillery pieces.28 For the first time in post-independence Indian
history, a prime minister had to assure Parliament publicly that neither he
nor his family were involved in any illegal activity.
According to J.R.D. Tata, the externalisation of corruption began in
1980 with the return to power of the Congress Party and Indira Gandhi. In
a private meeting with R. Venkataraman, President of India, Tata told the
President that 'since 1980 Industrialists had not been approached for
political contributions and that the general feeling among them was that the
party was financed by commissions on deals'. In the case of Bofors and
other defence deals, 'Tata said that though it was possible that neither Rajiv
nor members of his family had received any consideration in the gun and
other defence deals, it would be difficult to deny the receipt of commissions
by the Congress Party'.29
Tata's assessment of the shift in party funding was supported by the fact
that Rajiv's restoration of the legal right, of Indian companies to donate to
political parties abolished by his mother encountered such minimal
resistance. 'We stopped fighting against corporate contributions to political
parties', noted one of its strongest advocates, 'because it was clear that they
no longer counted."" By the 1980s direct cash contributions to political
parties by Indian business had ceased to be the dominant source of party
funds.
Although the liberal economic reform policies of June-July 1991
weakened the old iron triangle of Indian businessmen, politicians and
bureaucrats, they have not significantly altered the system of public sector
contracting. While the dismantling of major parts of the old permit, license,
quota raj reduced the power of Indian bureaucratic and political regulators
in the old economic ministries, the real action has shifted to the
infrastructure ministries. 'The corridors of Udyog Bhavan (home of the
Industries Ministry) may be empty after the dismantling of the "licence raj"
in the manufacturing sector', noted an industrial representative, 'but the
 164 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

crowd of industrialists, touts and agents has merely shifted to other

ministries - power, telecommunications, surface transport, civil aviation
and petroleum."1 'The Prime Minister', noted an editorial in the Economic
Times,
goes abroad and invites investment. All our babus are taken care of,
he assures foreign investors; the doors are open, there are no barriers
... When the investors do come, they learn that they have been sold
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only half the story. The babus have been pushed behind; the
politicians stand in front.32
The pervasiveness of the system is reflected in the persistent demand by
the World Bank, the press, Indian business and foreign investors for greater
'transparency' in government policy and procedures. In the words of Tarun
Das, Secretary General of the Confederation of Indian Industry (CII),
'nowhere are the policies clear, transparent and provide for automatic
clearance. Everything is done on a case-by-case basis; everything is non-
transparent; everything has to be negotiated'." Delay, discretionary action
and kickbacks become the rule. 'The sums involved', noted an editorial in
Business Standard, 'are so large and the opportunities so many that no
ordinary politician is able to resist the temptation to dip his fingers for a
quick profit. The result is delay and confusion'.34
Because of the Government of India's financial difficulties a large
number of infrastructure contracts have been opened up to foreign
multinationals. This has generated considerable resentment and resistance
from Indian business and has reinforced Swadeshi and anti-multinational
sentiments. 'Thanks to corruption at the political level', noted the Business
Standard, 'even the domestic producer has not benefitted. While they are
frozen out, the triumvirate of politicians, bureaucrats and foreign firms have
had their pickings.'35 The loss of lucrative contracts to foreign multi-
nationals has thus resulted in sectors of Indian business joining with
bureaucrats and Congress politicians opposed to reforms to block action. In
the telecommunications sector, for example, Indian business has been seen
as the chief force in getting Home Ministry and security services to block
action in the name of national security.36 Indian business resents foreign
interlopers taking their markets and their contracts.
The manipulation of infrastructure policy in India operates at two
distinct levels. The first concerns the substance of the policy and the second
involves the procedures adopted in translating the policy into action. In
India, policy is made by a small group of decision makers at the top of the
system. The key players are the Prime Minister, the Prime Minister's Office
(PMO) and the minister and the secretary of the ministry concerned. The
policy is then passed down through the bureaucracy for implementation.
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 165

Since the policy is usually very general it requires the development of

detailed guidelines. Those who are opposed to the policy will attempt to
develop guidelines that will scuttle the policy. Others will use the process to
their own advantage. 'Whenever policies are not comprehensive', noted
India Today, 'it becomes a reason for endless delay and administrative
haggling, a way of asserting the discretionary power of the bureaucrat and
an opportunity for bribes and corruption.'" The guidelines are kept secret
from those affected so as to enhance discretionary power further.
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Policy ambiguity is reinforced by procedural manipulation and decision

making on a case-by-case basis. The case-by-case approach results in a
highly complex process of collecting proposals, selecting those that fit the
guidelines, comprehensive vetting of the proposals recommended and a
final decision based on the thorough review of each case. The process is
open to delay and manipulation at each stage and has generated intense
lobbying, court challenges and repeated charges of a lack of transparency.
In the power sector, for example, the government received proposals for 75
projects worth Rs.1.04 lakh crore for the generation of 32,662 MW of
power.38 All projects had to be cleared by the Cabinet Committee on Foreign
Investment and by the government of the state in which the project was to
be located. An initial group of fast-track projects were to be allocated on the
basis of negotiations and not by the usual process of competitive bidding.
Foreign companies have charged that the system lacked transparency and
that decisions were taken solely on the basis of whims and fancies of the
ministers and bureaucrats involved.39 The most notorious case cited
involved the Rs. 4,000 crore Krishnapatnam Thermal Project in the state of
Andhra. The original project called for building a 1,000 MW project. For
some unknown reason, however, the project was split into two separate
parts and contracts were awarded to two different companies. The formal
selection procedure, moreover, called for the recommendation of the project
by a consultant, vetting of the recommendation by an Investment
Committee headed by the chief minister and cabinet approval of the final
decision. The award of one of the contracts to G.V.K. Industries, however,
touched off a firestorm of criticism. G.V.K. Industries was a company which
was known to be close to the chief minister and, it was charged, the award
of the contract did not follow established procedures. Although the proposal
was recommended by a consultant and approved by the investment
committee, the chief minister immediately approved the recommendation
and simply placed it before the cabinet as a fait accompli for formal
ratification. The chief minister's action was met by an uproar from
opposition political parties and even from members of his own cabinet.
Opposition to the chief minister's initial decision grew even more intense
when the second half of the contract was awarded to a relatively small
 166 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

American company represented in India by the chief minister's son-in-law.

The chief minister was charged with nepotism, corruption and insensitivity
to democratic norms.40 The charges against the Andhra chief minister were
compounded by charges of similar indiscretions on other contracts.41
Charges of a lack of transparency involving infrastructure projects have
also been levied at the national level. The most dramatic involved the $2.8
billion contract awarded to Enron, an American energy company based in
Houston, Texas. Although an investigation failed to produce evidence of
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corruption, the contract was cancelled by the Maharashtra government.

'The difficulty', noted Business Standard,
is that as long as the government is a major player, and as long as the
imperatives of political funding remain what they are, transparency
will always be at a discount. It would reduce the various ministers'
room for maneuver too drastically. Whence the need for privatisation,
because that would shift the costs of poor business judgement and
graft to private sector rather than public sources.42
The problem of corruption has become so acute in India that a recent study
by Transparency International ranked India as one of the most corrupt
business environments in the world.43 Real transparency in India, however,
requires not only clear policy but also the development of alternative
mechanisms for funding parties and elections.

Reforms and Collective Action

Although lobbying for particularistic benefits will continue to play some
role, the economic reforms of 1991 have fundamentally altered the policy
environment and business-government relations. The reforms have
abolished a large number of instruments of control and regulation of the
private sector and have eliminated the need for repeated business visits to
government offices to secure various permissions and clearances. As a
result the preoccupation of businessmen and their associations with micro-
level economic and regulatory policy has been replaced by a need to effect
broad macro-level economic policies of the Government of India. This shift
in focus in turn has required a totally different style of behaviour and
lobbying. The pursuit of particularistic benefits has given way to a need for
greater collective action and closer business-government co-operation and
co-ordination.
The need for greater collective action has had a profound effect on the
leadership, organisation and lobbying and styles of Indian business
associations. The 1980s was a decade of turmoil for India's peak associations.
The decade saw a split in the elite-dominated FICCI, a reorganisation and
indigenisation of Assocham, the rise of the Confederation of Indian Industry
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 167

(CII) and a major fight among these apex associations for supremacy and
proximity to government.44 Historically, the FICCI represented the voice of
indigenous capital while Assocham spoke on behalf of foreign capital.
Increasingly, however, they have become mirror images of each other and
are seen by government officials as ineffective, grievance-oriented, ageing
dowagers. In contrast, the CII, which came on the scene in the mid-1970s,
has increasingly gained a reputation as a professionally run, outward
looking, pro-active organisation with fresh ideas, a promotional style and a
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developmental orientation. The CII has developed a close rapport with the
Government of India and has become the most effective and powerful
lobbying organisation in the country. Over the years the CII has
systematically established deep roots in each of the major economic
ministries, the Ministry of External Affairs and the Prime Minister's Office
(PMO). Its lobbying style is based on a more professional version of the
principle of quiet diplomacy traditionally employed by Assocham and the
techniques developed by the liaison men and lobbyists representing India's
major business houses. The key to the CII's lobbying success is the
development of a close working relationship with the bureaucracy, India's
permanent government, and an emphasis on the commonality of interests
which stresses the joint objective of economic development. CII leaders and
staff select key bureaucrats in critical economic ministries and attempt to
build a trusting relationship with them. The process involves frequent
informal personal contacts, providing up to date information, avoidance of
public criticism and working to help bureaucrats achieve their policy
objectives without asking for a quid pro quo. Having established a close
working relationship, demands are submitted in the form of carefully
prepared briefs based on reliable data and well-reasoned arguments.
Discussions are held in private and are based on a non-confrontational,
constructive, co-operative, problem solving and bargaining style of
negotiation. This style has given the CII a reputation within the bureaucracy
of an organisation that produces quality work and is highly professional,
forward looking and dynamic.45
Since the introduction of the 1991 reform programme, the CII has began
to play an increasingly influential role in shaping economic policy. They
were credited, for example, with having lobbied successfully for reform of
the Foreign Exchange Regulation Act (FERA),46 and the Revenue Secretary
of the Government of India went so far as to call the 1993-94 budget the
'Tarun Das Budget', a reference to the powerful Secretary General of the
CII. As a result of its successes, the CII likes to refer to itself as the 'junior
partner of the government'.47 The FICCI and Assocham, increasingly
embittered by the growing visibility and influence of the CII, have begun to
accuse the organisation of being a handmaid and stooge of the government.
 168 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

At the same time, both organisations have embarked upon a major

reorganisation designed to enable them to compete more effectively with
the CII.48
Although the business community has been the chief beneficiary of the
1991 economic reforms, the reforms have not enjoyed the unified support
of the business elite or India's apex business associations. While most
industrialists and associations welcomed the move toward deregulation and
decontrol of the domestic private sector 'as a dream come true',49 they were
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far less enthusiastic about reducing tariff protection for Indian industry, the
opening of the Indian economy to foreign trade and investment and
globalisation of the Indian economy. In the words of one industrialist,
'globalization is an attractive idea but it doesn't suit my pocket ... It is a
luxury I cannot afford'.50
Business resistance to economic reform crystallised in late 1993 as the
immediate economic crisis began to ease. The initial attack came from
members of the Bombay Club, an informal group of powerful elite families.
The Bombay Club issued a public statement highly critical of the reform
policies as unfair to domestic capital and failing to create a level playing
field.51 The statement demanded numerous changes in policy. First, the
Bombay Club demanded that government focus upon a comprehensive
series of internal reforms which would enable domestic producers to
become more competitive and provide for an extended period of adjustment
for domestic industry prior to any attempt to open the Indian economy to
external competition. Second, the Bombay Club objected to government
liberal policies toward private foreign investment. They especially
expressed anxiety over the government's decision to raise foreign
investment equity levels from 40 per cent to a controlling 51 per cent, the
takeover of Indian local companies by foreign multinationals and attempts
by non-resident Indians (NRIs) to gain control of Indian companies by
buying large blocks of shares and replacing the original promoters of the
enterprise. The Indian business elite also charged that government was
providing benefits to private foreign investors that were not being provided
to domestic industry, especially in the case of infrastructure projects. Third,
they opposed the planned reductions in protective tariffs on Indian industry
and the opening up of the Indian economy to foreign goods. Since the tariff
on finished goods would decline while local excise and sales taxes on
industrial inputs remained high, the cost of Indian-made goods would
become uncompetitive. This would result in unfair competition and would
lead to plant closures and increased unemployment. Fourth, the Bombay
Club charged that tight credit policies and high interest rates placed
domestic industry at a competitive disadvantage compared to foreign
capital. Finally, they charged that failure to reform India's complex labour
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 169

laws, the failure to enact an exit policy which would enable unprofitable
industries to close and a failure to reform or privatise the public sector
limited the impact and effectiveness of the reforms. Underlying the Bombay
Club's critique of the reform package was a strong swadeshi tone which
sought continued tariff protection, limits on foreign investment and a desire
to keep the Indian market closed to outsiders for at least an additional
decade or even more.
While each of India's major apex associations applauded the Bombay
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Club's call for a level playing field, the strongest endorsement of the Club's
policy critique came from the FICCI. In a series of speeches on behalf of the
organisation, Ajay K. Rungta, the President of the FICCI, has continued to
emphasise the unhappiness of India's industrial elite with key elements of
the reform package. Rungta has demanded a go-slow policy on
globalisation and has warned the government that a rapid policy of
globalisation would 'boomerang'. 'A drastic lowering of protective tariffs',
he warned, 'will bring in high quality, low priced foreign goods which will
result in the closing of a large number of domestic industries'. India, he
insisted, should adopt the Japanese and South Korean model of
protectionism in which the economy was opened up only after 20 years of
export-led growth. Rungta has also charged the government with tilting in
favour of foreign capital and has insisted that the interests of domestic
capital must be safeguarded against foreign direct investment." Finally, the
FICCI President has raised substantial doubts about the role of the private
sector in the development of Indian infrastructure. Government, he insisted,
cannot afford to abandon its responsibility for infrastructure development.
'The Indian private industry', he warned, 'has neither the taste nor the
experience of such high cost, long-gestation and low return projects.'"
While the FICCI has been the most open in its criticism of the
government reform policies, the CII has taken a much more subtle
approach. Publicly the CII has been a major proponent of the reform
package both at home and especially abroad. Yet many of its most
prominent members were leaders of the Bombay Club and the organisation
has been one of the most vocal supporters of the demand for a level playing
field and continued tariff protection of the Indian engineering industry, its
chief constituency. The CII has also fought for a reduction of tariffs on
components, reductions in excise taxes and special price benefits for
domestically produced goods.54
The policy reforms of 1991 were a response to a crisis brought on by
external forces and severe domestic economic difficulties. They were
initiated by a small technocratic elite within the bureaucracy supported by
the prime minister and his finance minister. They enjoyed a shallow base of
support in the government, the party and the country. They were grudgingly
 170 THE JOURNAL OF COMMONWEALTH & COMPARATIVE POLITICS

accepted because of a widespread feeling that there was no alternative. The

initial wave of reforms, moreover, were limited and had a minimal impact
on key interest groups, including major business families, big farmers,
union workers, public sector employees and politicians dependent upon
their ability to distribute benefits and patronage to constituents in the form
of subsidies, cheap credit, public sector jobs and regulatory benefits. Once
the immediate crisis had passed, therefore, opposition and resistance began
to grow and the reform process began to slow down. While there was no real
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domestic pressure for reversing the measures already taken, the failure to
build a large constituency in favour of reforms eventually resulted in a
policy stalemate before the reforms could be completed. The shallow
support base and the failure of government leaders to sell the reform
package enables critics to block further action on such key elements of the
reform package as exit policy, company law reform, subsidies, privatisation
and transparency in the awarding of infrastructure contracts. In the words of
the chief economic adviser to the Government of India,
Everyone thinks great reforms have been done, but that is not
absolutely true ... All that has been done is stabilisation. Proper
reforms mean creating competition, creating an arms length
relationship between government institutions and business, changing
employment patterns, foreign trade. These things the government has
hardly begun.53
The failure of the Rao government to build a strong constituency behind
the reforms has had the effect of slowing the process of implementation and
consolidation. Attracting support, therefore, requires substantial economic
improvements. Since tangible results of the reform package take time, the
entire process remains vulnerable. In addition, consolidation of the reforms
requires the development of a more effective system of institutional
consultation, especially between government and the private sector, in order
to make the reforms more effective. Yet almost the entire system of
government advisory and consultative bodies developed in the early years
of planning have become all but moribund.
Throughout the post-independence period, major changes in Indian
economic policy have seldom been a response to domestic political
pressure. Rather, major changes in economic policy have occurred in waves
or cycles triggered by external crises. Balance of payments crises in 1958,
1973, 1979 and 1991 each forced a major shift in domestic economic
policies. These reforms are usually initiated by a small technocratic elite in
the bureaucracy supported by a small group of key political leaders. Since
the reforms enjoy a shallow base of support, they become very difficult to
sustain against charges that the policy represents a repudiation of the basic
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 171

development consensus of the Nehru era. Consolidation of the reforms,

therefore, become blocked and further change must await the next crisis,
which again forces a new wave of change. As a result, the reform process
in India has taken a long time. Reform of the Indian economy has been
going on ever since the populist era of 1973, by which time India had
created one of the most controlled and regulated economies in the non-
communist world. India, unlike China, has never developed a Deng
Xiaoping or a leadership committed to fundamental economic reform and
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has, therefore, been forced to follow an incremental, cyclical model of

crisis, adjustment, minor alteration, inaction and crisis. The current
stalemate in the reform process will continue until the 1996 national
elections, and the character of the next wave of reform will depend on the
results of those elections.
While the future of economic reforms in India remains uncertain,
changes in government policy have fundamentally altered the
business-government relationship and business lobbying. Collective action
will become increasingly important and the ability of Indian business to
work closely with government will become critical to Indian development.
A closer partnership between business and government, however, is not
absolutely assured. Indian reforms continue to meet resistance from
politicians, bureaucrats and sectors of the business community that would
like to see a restoration of the old iron triangle which provided benefits to
each of the participants. If the process of reform does continue, however, the
new set of informal relations between business and government must be
translated into more formal mechanisms which would permit more frequent
and continuing interaction. In short, while business-government relations
have improved, the CII's vision of 'India Inc.' remains a distant dream.
Although Indian business has become more effectively organised, is more
vocal and has become more pro-active, it remains divided and subordinate
to government. It remains at best a junior partner, and not an equal partner,
in a political system in which the state continues to enjoy considerable
autonomy.

NOTES

1. This paper is part of a larger study of interest politics in South Asia and was supported by a
Fulbright South Asia Regional Research Fellowship for field work in India, Pakistan and
Bangladesh in 1993-94.
2. For a discussion of the relationship between public policy and interest group behaviour see
Harry Eckstein, Pressure Group Politics: The Case of the British Medical Association (Palo
Alto: Stanford University Press, 1960); and Theodore Lowi, 'American Business, Public
Policy, Case Studies and Political Theory', World Politics 16 (July, 1964), 677-715.
3. See FICCI and Assocham, Economic Reforms in India: Highlights (New Delhi: Joint
 172 THE J O U R N A L OF COMMONWEALTH & COMPARATIVE POLITICS

Business Council, Nov. 1993).

4. See Robert L. Hardgrave, Jr. and Stanley A. Kochanek, India: Government and Politics in a
Developing Nation (New York: Harcourt Brace Jovanovich, 1993), pp.354-73.
5. Kyōko Inoue, Industrial Development Policy of India (Tokyo: Institute of Developing
Economies, 1992).
6. Stanley A. Kochanek, Business and Politics in India (Berkeley, CA: University of California
Press, 1974), 91-193.
7. Ibid., 289-302.
8. Rusi J. Daruwala, The Bombay Chamber Story 150 Years (Bombay: The Bombay Chamber
of Commerce & Industry, 1986), 282-3.
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9. Financial Express (New Delhi), 5 April 1986 and 30 Jan. 1989. Note, MRTP refers to the
Monopolies and Restrictive Trade Practices Act and FERA refers to the Foreign Exchange
Regulation Act.
10. CII Press Release, 16 May 1995.
11. Gita Piramal, 'The Politics of Business', Independent (Bombay), 28 March 1991.
12. Kochanek, Business and Politics, 98, 226, 266, 296.
13. Ibid., 83-4.
14. C.S. Pandit, End of an Era (New Delhi: Allied Publishers Pvt., 1977), 113.
15. Times of India (Bombay), 30 Aug. 1977.
16. The Economist (London), 8 Jan. 1983,65.
17. Sharad S. Marathe, Regulation and Development: India's Policy Experience of Controls over
Industry (New Delhi: Sage Publications, 1986), 60.
18. Pandit, End of an Era, 70.
19. Krishan Bhatia, Indira: A Biography of Prime Minister Gandhi (London: Angus and
Robertson, 1974), 267.
20. Prem Shankar Jha, India: A Political Economy of Stagnation (Bombay: Oxford University
Press, 1980), 273.
21. Pandit, End of an Era, 189.
22. Margaret Herdeck and Gita Piramal, India's Industrialists, I (Washington, DC: Three
Continents Press, Inc., 1985), 385.
23. Business India (Bombay), 23 Jan.-5 Feb. 1989, 50-56.
24. Ibid., 55.
25. Ibid., 56.
26. India Today (New Delhi), 15 May 1987, 18.
27. New York Times. 9 Feb. 1986.
28. See The Overseas Hindustan Times (New Delhi), 4 April 1987, 4; India Today (New Delhi),
15 Feb. 1987, 15-18 and 15 May 1987, 12-23; and Far Eastern Economic Review (Hong
Kong), 30 April 1987, 25.
29. R. Venkataraman, My Presidential Years (New Delhi: Harper Collins, 1994), 40.
30. Interview New Delhi, Aug. 1994.
31. Economic Times (New Delhi), 1 Aug. 1994 and Financial Express (New Delhi), 26 June
1994.
32. Ibid., 8 Aug. 1994.
33. Ibid., 1 Aug. 1994.
34. Business Standard (Calcutta), 10 Aug. 1994.
35. Ibid.
36. The Times of India (New Delhi), 5 July 1994.
37. India Today (New Delhi), 15 Dec. 1994, 10.
38. Financial Express (New Delhi), 26 June 1994.
39. Business India (New Delhi), 22 July to 6 Aug. 1994, 38-40.
40. Business Standard (Calcutta), 9 Aug. 1994; and Economic Times (ed.) (New Delhi), 1 Aug.
1994.
41. Ibid.
42. Business Standard (Calcutta), 10 Sept. 1994.
43. The New York Times, 13 Sept. 1995 and 20 Sept. 1995.
44. See Stanley A. Kochanek, 'The Transformation of Interest Politics in India', Pacific Affairs
 LIBERALISATION AND BUSINESS LOBBYING IN INDIA 173

68 (Winter 1995-96), 525-50.

45. Based on interviews in New Delhi, Aug. 1994.
46. Business Standard (Calcutta), 12 Jan. 1992.
47. Business and Political Observer (New Delhi), 24 Dec. 1994.
48. Indian Express (New Delhi), 1 June 1993.
49. Patriot (New Delhi), 25 July 1991.
50. Times of India (New Delhi), 15 Aug. 1993.
51. India Today (New Delhi), 15 Nov. 1993, 60-65.
52. Financial Express (New Delhi), 12 Feb. 1995.
53. The Pioneer (New Delhi), 30 Sept. 1995.
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54. Confederation of Indian Industry, Economic Reforms and Industrial Growth - The Pending
Agenda (New Delhi: CII, 1994).
55. Far Eastern Economic Review (Hong Kong), 2 Feb. 1995, 42-6.