India’s entry into the new millennium has been marked by a series of dramatic ruptures with its post-independence settlement. The most insulated large economy of the capitalist developing world, with the most autonomous bourgeois bloc, has adopted a neoliberal form of integration into the world market. A right-wing, Hindu nationalist and authoritarian force, the Bharatiya Janata (Indian People’s) Party, has taken power, replacing the Congress Party as the centre of the political system. India has exploded an atomic bomb. Of the four Nehruvian principles that had officially guided India’s modernizing project since 1947—socialism, secularism, democracy and non-alignment—the first and last have been abandoned; the second has been redefined to accommodate Hindu nationalism, while the third, whose preservation was the great success story of an otherwise mottled record, is threatened as never before.

It is the conjunction of a sharp neoliberal turn in the economic sphere with a drastic confessional and chauvinist twist in the political sphere that singles out Indian development in the general panorama of the nineties. Here it is not the unction of the Third Way that is smoothing the passage to an increasingly deregulated capitalism, but the intoxicant of a firebrand communalism. The government now pressing ahead with privatization of public assets, reduction of import barriers and facilitation of foreign investment, has risen to power amid scenes that are a far cry from quiet meetings in panelled rooms with the IMF. The BJP of today owes its power in Delhi to two defining episodes of India’s turn from the Nehruvian Consensus. In the autumn of 1990, its then leader L. K. Advani set out around the country on a rath yatra, or ‘chariot tour’, to whip up Hindu indignation against an alleged crime of Babar, the first Mughal Emperor, accused of destroying a temple marking the mythical birthplace of the God-King Ram, in the small town of Ayodhya, Uttar Pradesh, in order to build a mosque on its site. Advani’s chariot, supposedly based on the horse-drawn carts of the Mahabharata—in reality, a decked-out Toyota van—paraded through nearly two dozen large cities and hundreds of small towns and villages for a month, leaving a trail of violence against Muslims in its wake. Advani was eventually arrested in Bihar, but soon afterwards a frenzied mob scaled the walls of the compound surrounding the Babri mosque and planted saffron flags on one of its sixteenth-century domes.

No one was prosecuted for this criminal act, and the BJP vote rose substantially in response to it. Two years later, as police and paramilitaries stood by, a huge crowd stormed the compound and, for the next five hours, in full view of the TV cameras, set about the demolition of the mosque. The images flashed round the world: pick-axes, saffron scarves, shouting, rubble, dust. Murderous pogroms that night and in the succeeding days claimed over four hundred lives across north and west India, with some of the worst bloodshed in Bombay. In the traumatized aftermath, Advani had to resign—but the mosque was gone: what was once unthinkable had become historical fact. It was now widely accepted that ‘Hindu sentiment’ expressed the will of the majority and must be heeded—Congress competing to do so. Four years later the BJP became the largest party in the Lok Sabha. By early 1998 it was in power.

Such was to be the extraordinary political background to the neoliberal turn of the nineties. A change of economic course was by then already in train. From the fifties through the seventies, India had followed its own distinctive version of the import-substitution industrialization model, more inward-oriented and state-regulated than elsewhere. The class character of the state was likewise sui generis—a dominant coalition comprising all sections of industrial capital, substantial landowners, and senior bureaucrats, in which state functionaries operated as overall coordinators.footnote¹ In the eighties, a maturing bourgeoisie, more confident of handling external competition, and a burgeoning ‘middle class’—actually an elite of mass proportions—hankering after higher levels of consumption, pushed for a cautious integration into global markets. After Rajiv Gandhi came to power in 1984, there was a decisive break with the import-substitution model, which prepared the way—but certainly did not dictate—the trajectory of the nineties. Between the anti-dirigisme of the eighties and the neoliberalism of the nineties there lay a space wide enough to allow variant capitalist options. One possible path was the East Asian model of industrialization, which might have drawn on at least three lessons of Indian experience: the need to mobilize under-utilized surplus labour through land reform and infrastructural works in the countryside; the importance of a high domestic savings rate; and the strategic role that state direction of credit and investment could play. The neoliberal route was not pre-determined. What explains it as an economic direction, and how is it related to the political upheavals of the period?

The elite-led industrialization strategy of the eighties attenuated the restraints on monopoly growth and diversification, reduced foreign exchange and trade controls, and weakened but did not disband the public sector. Its aim was to make the corporate private sector—even today amounting to only 10 per cent of GDP—the leading edge of the Indian economy. On the demand side, the aspirations of the middle class—in reality comprising the top 10 to 15 per cent of the population—were massaged with major tax reductions and considerable import liberalization which, it was believed, would stimulate exports sufficiently to overcome any balance of payments difficulties. The result was a consumption boom led by the durable goods sector, whose expansion surged from 8 to 22 per cent a year through the decade. Overall growth rates rose to 5.6 per cent, well above the old ‘Hindu rate of growth’ of 3.5 per annum in previous decades. But there was no pick-up in the pace at which poverty declined, while social and regional inequalities widened. What undid the model, however, was its inadequate export performance, leading to a burgeoning current account deficit, and the fiscal profligacy of the Central government.footnote² As tax receipts fell, the revenue gap was covered by higher and laxer government borrowing—more reliance on short-term commercial loans and volatile Non-Resident Indian (NRI) bank deposits. External debt nearly trebled over the decade, from $23.8 billion to $62.3 billion, with $6 billion needing to be immediately rolled over, while the debt-service burden rose from 15 to 30 per cent of export earnings, and government interest payments from 10 to 19 per cent of total expenditure.

The inevitable result was massive capital flight in anticipation of a devalued rupee. Between April and June 1991 there was a net outflow of $1 billion, to a point where foreign-exchange reserves could barely cover two weeks’ imports. On the verge of a default that would have severely disrupted the economy, New Delhi went for a strings-attached IMF–World Bank loan. Given its size and level of development, India could have negotiated reasonably easy terms. Instead, in the guise of a supposedly unavoidable Stabilization and Structural Adjustment Programme, the Congress government of Narasimha Rao brought in a drastic and unexpected set of changes in trade, industry, foreign investment and technology regimes, public and financial sectors: a long-term ‘solution’ to a short-term balance of payments crisis.

By the standards of India’s past the neoliberal reforms under way since 1991 have been truly dramatic, even if their scope has been partial and uneven in comparison to experience elsewhere, and their implementation relatively slow. Differences over pace and sequencing exist, and there is widespread agreement that capital controls (which protected India from the fall-out of the East Asian crisis) will need careful phasing out. But in the political and intellectual arena, the ideological hegemony of neoliberalism is currently overwhelming. Where does it come from? It is fairly clear that the ‘new economic policy’ (NEP) originated in the apex of the state bureaucracy, not the industrial or agrarian bourgeoisies. In the eighties, the upper echelons of functionaries in the Ministries of Finance, Commerce and Industry were increasingly drawn into the mental orbit of their counterparts in the West.footnote³ Closer contacts between top Indian bureaucrats and their opposite numbers in the IMF and World Bank, with many a secondment to Washington, created a predisposition towards purer free-market doctrines that was greatly reinforced by the collapse of the Soviet Union. The general stampede by East European and Russian governments themselves to adopt neoliberal remedies seemed confirmation to many that there was no alternative—only, perhaps, a risk of coming last. Prominent NRI economists working in British and American universities added their weight to the growing consensus. Though Delhi has paid lip service to the welfarist views of Amartya Sen, the first Indian-origin Nobel Prize winner in Economics, the content and spirit of the reforms have been much more in tune with the views of another NRI economist and Nobel aspirant, Columbia University’s Jagdish Bhagwati, a lifelong critic of Sen.