Three mutually reinforcing and interrelated contradictions of the 'Nehruvian strategy' need to be noted. First, the State within the old economic policy regime had to simultaneously fulfil two different roles which were incompatible in the long-run. On the one hand it had to maintain growing expenditures, in particular investment expenditure, in order to keep the domestic market expanding. The absence of any radical land redistribution had meant that the domestic market, especially for industrial goods, had remained socially narrowly-based; it had also meant that the growth of agricultural output, though far greater than in the colonial period, remained well below potential, and even such growth as occurred was largely confined, taking the country as a whole, to a narrow stratum of landlords-turned-capitalists and sections of rich peasants who had improved their economic status. Under these circumstances, a continuous growth in State spending was essential for the growth of the market; it was the key element in whatever overall dynamics the system displayed. At the same time however the State exchequer was the medium through which large-scale transfers were made to the capitalist and proto-capitalist groups; the State in other words was an instrument for the "primary accumulation of capital". Through the non-payment of taxes (which the State generally turned a blind eye upon), through a variety of subsidies and transfers, through lucrative State-contracts, private fortunes got built up at the expense of the State exchequer.
 
The contradiction between these two different roles of the State manifested itself, despite increasing resort to indirect taxation and administered price-hikes, through a growth in the fiscal deficit, i.e., the excess of total government expenditures, both revenue and capital, over government revenues. A persistent and growing fiscal deficit, under all circumstances, necessarily and inevitably undermines the State capitalist sector and strengthens demands for a rolling back of intervention. A fiscal deficit has to be financed through borrowing, i.e., through the private holding of additional claims directly or indirectly (mediated through the banking system) upon the State. If the borrowing is from abroad, then the building up of pressure for a change in the policy regime is obvious. If the borrowing is domestic then private wealth-holders may be willing to hold claims upon the State only after they have increased their holdings of other assets, such as urban property or consumer durables or commodity stocks, in which case the fiscal deficit has an immediate inflationary impact owing to this, and to keep inflation under check the State would have to cut back its expenditure which slows down the economy and eventually arouses capitalists' demands for an alternative policy regime. Even if private wealth- holders are willing temporarily to hold government debt without there being any inflationary pressures immediately, this only accentuates the inflation-proneness of the economy in the long- run with identical results. And finally at some point, both at home and abroad, the demand is raised that in lieu of claims upon the State, the private wealth-holders should be allowed to hold State property directly, i.e. for the privatization of State- owned units. This is the sort of demand that we are witnessing in India, namely that the State should cut down its fiscal deficit and its influence naturally was in the direction of adopting the Fund-Bank policy regime by "privatizing" several public sector units.
 
The second contradiction lay in the inability of the State to impose a minimum measure of "discipline" and "respect for law" among the capitalists, without which no capitalist system anywhere can be tenable. Disregard for the laws of the land, especially tax-laws, was an important component of the primary accumulation of capital. The same disregard, the same absence of a collective discipline which a capitalist class imposes upon itself in any established capitalist country also meant that a successful transition could not be made from a Nehruvian interventionist regime to an alternative viable capitalist regime with State intervention, but of a different kind. After all the State is strongly interventionist even in a country like Japan, but it is interventionism based on close collaboration between the State and capital which simultaneously promotes rigorous discipline among the capitalists. Indeed many advocates of a retreat from Nehruvian dirigisme had talked explicitly of the Japanese "model" and had hoped for a new consolidation of Indian capitalism much in the way that Japanese capitalism had consolidated itself. They were of course being unhistorical; an important aspect of their unhistoricity was their refusal to recognise the inability of the Indian State to impose a measure of "discipline" on Indian capital.
 
The third contradiction had its roots in the cultural ambience of an ex-colonial society like ours. The market for industrial goods was from its very inception, as we have seen, a socially narrowly-based one. Capitalism in its metropolitan centres however is characterised by continuous product innovation, the phenomenon of newer and ever newer goods being thrown on to the market, resulting in alterations of life-styles. In an ex- colonial economy like ours, the comparatively narrow social segment to whose hands additional purchasing power accrues in a large measure and whose growing consumption therefore provides the main source of the growth in demand for industrial consumer goods is also anxious to emulate the life-styles prevailing in the metropolitan centres. It is not satisfied with having more and more of the same goods which are domestically-produced, nor is it content merely with expending its additional purchasing power upon such new goods as the domestic economy, on its own, is capable of innovating. Its demand is for the new goods which are being produced and consumed in the metropolitan centres, and which, given the constraints upon the innovative capacity of the domestic economy, are incapable of being locally-produced purely on the basis of indigenous resources and indigenous technology. An imbalance therefore inevitably arises in economies like ours between what the economy is capable of locally producing purely on its own steam, and what the relatively affluent sections of society who account for much of the growth of potential demand for consumer goods would like to consume. This imbalance may be kept in check by import controls. But the more the imbalance between what is produced and what is sought to be consumed is kept in check through controls, the more it grows because of further innovations in the metropolitan economies. The result is a powerful build-up of pressure among the more affluent groups in society for a dismantling of controls which would result in substantial sections of domestic producers going under, i.e., in a de-industrialization in the domestic economy, together with an accentuation of the already precarious balance of payments situation, which does not come in the way of such pressures being built up.
 
It is in this light that the new policy regime being instituted by the government has to be assessed. That regime has two components. First, it involves a set of measures aimed at "stabilisation" or bringing the rate of inflation and the current account deficit on the balance of payments to acceptable levels. At the centre of that stabilisation strategy is a reduction of the fiscal deficit on the government's budget through a cut in expenditures (principally subsidies) and enhanced resource mobilisation, and a devaluation of the rupee aimed at raising the rate of growth of exports and curbing imports. Second, it involves a strategy of "structural adjustment" that, by liberalising imports and subjecting domestic industry to the cutting edge of international competition, permitting the free inflow of foreign direct and portfolio investment, dismantling regulation of domestic and foreign private capital and privatising the public sector, aims to "get prices right". This, it is argued, would improve the efficiency of domestic economic activity, reallocate resources to areas where India has a comparative advantage relative to its international trading partners, improve its export competitiveness, and raise the medium term rate of growth on the basis of a stimulus provided by the international market. Export surpluses are now to take the place of State expenditure as the principal stimulus to growth.
 
From the point of view of international finance capital, this a strategy which seeks to bring developing country external deficits down to reasonable levels without adversely affecting the operation of transnational investment in their markets. It should be clear that this new regime is not so much an effort to overcome the constraints faced by the Nehruvian strategy, but aims to shift out of that strategy altogether. No more is metropolitan capital to be held at bay, but rather domestic capital would have to either compete with international capital or collaborate with it to obtain a foothold in either the domestic or the international market. Given the strength of the transnational monopolies that developed country governments nurture, protect and strengthen, there are limits to the ability of as-yet-underdeveloped economies to compete. This implies subordination as part of a strategy of growth. One cost of such subordination is of course the fact that growth depends on the willingness of transnational corporations to use India as a location for world-market oriented production. The less that inclination in a world where all countries compete to attract foreign investment, the greater the extent of deindustrialisation, the lower is the rate of growth of the system and the greater the burden heaped on the poor and the working people.
 
It is the belief that the extent of deindustrialisation would far outweigh any gains from tethering a nation to the world economy that underlay the dirigiste regime which India opted for at independence. That regime was dictated by the perception that given the extreme external vulnerability characterising the open economic regime that India was subject to under colonial rule, a degree of isolationism that curtailed the inflow of imports and displaced metropolitan capital in the domestic market was inevitable. If that strategy had not been adopted there is no reason to expect that India would have seen any departure from the economic stagnation that characterised the first half of the century.