Finance, Foreign Investment and Underdevelopment: The New Faces of Dependency in India

The nationalist movement in pre-Independence India was basically framed around the political opposition to dependency; swadesh, its first principle, meant (economic) self-reliance, along with the defining idiom of the handloom and homespun, rather than imported, cloth. Nationalist thinkers from Gandhi and Patel to Nehru and Bose argued that the dependent economic relations India had with Britain would keep the former poor and the latter rich; the structures and institutions of postcolonial political economy were built to enhance India’s independent development and self-reliance by replacing imports for domestic manufacturing. Forty years on, many of these structures and institutions have been dismantled in a programme of economic liberalization. This paper serves to assess whether relations of dependency have reemerged to characterize India’s relationship with the international economy, and if so, how and why.

It argues that the relations of dependency have reemerged under new guises. Dependency has moved from simple flows of trade and direct investment to the power of international finance, portfolio investment and consultancy services to define India’s role in the international economy. The truism among international investors that India’s future is with services rather than industry has led to higher costs and more restricted access to technology for India’s manufacturers, while information technology services have developed strong links with leading transnational corporations at the expense of developing its own intellectual capital. Further, the new emphasis on foreign direct investment in raw material extraction and consumer services has eclipsed traditional arrangements that could increase domestic value-added activities as part of state-mandated or –encouraged joint ventures. Lastly, India’s growing energy requirements have not inspired greater attention in alternative energy sources, but rather created incentives for investment in downstream energy processing, such as oil refineries and electricity transmission, that increases demand and arbitrage without expanding supply. These characteristics of the post-reform economy have made India subject to more dependent relationships, even as the international economy and the structures of dependency have changed.

This paper will also suggest some of the theoretical mechanisms that are driving the new dependency. First, the international demonstration effect has driven consumers to change their behavior ever more quickly as global communications and information have increased, stimulating imports and putting ever greater pressures on the state to encourage foreign investment to finance current account deficits, without regard to quality of long-term sustainability. Second, macro-institutional change has dramatically decreased the state’s ability to regulate cross-border transactions, in institutional finance in particular. And third, cognitive-ideational frameworks fashioned in the West that concern how the Indian economy is conceptualized achieve a certain level of hegemony through educational and institutional linkages, thus perpetuating how India is framed within the global economy.