Indian Federalism, Economic Reform and Globalization

In this paper we examine the interaction between globalization and India’s federal system, in the context of the country’s past decade of economic reform. In doing so, we explicitly recognize that the national government has subnational governments below it, and that all these layers of government simultaneously interact with foreign governments and corporations in a global economy. These multiple interactions have become more important as reform in India has opened up the economy to foreign trade and investment, and also reduced certain constraints on subnational governments. Globalization provides challenges as well as opportunities to federal systems such as India’s and this paper seeks to elucidate what these are, as well as drawing implications for policy and institutional reform. We highlight the problems caused for the financial sector as a whole by state and central fiscal deficits. We examine the implications of the new ability of state governments to directly seek FDI. We discuss the possibility that privatization of the financial sector can discipline governments at all levels, and the possible role of capital account liberalization in achieving this. We review past and proposed reforms in th