The World Bank and the federal politics of economic reform in India: Structural adjustment lending goes sub-national

In 1996, the World Bank and India began to evolve a new assistance strategy targeted at sub-national state governments committed to wide-ranging economic and governance reforms. This dissertation draws on official documents and interviews with key policymakers to show: first, why the Bank decided to propose such a strategy; second, why India's central government, despite its historic protectiveness of economic sovereignty, permitted the Bank to engage directly with states; and finally, how successful the strategy has been to date. The Bank, the study argues, is grasping for a way to increase its policy leverage and "relevance" in India---its largest borrower---and it perceived that focused state lending would enable it to do so. On the Indian side, the central government viewed selective Bank loans as a means of achieving desired reforms in state policies and in federal fiscal institutions that it could not bring about on its own for political reasons---a strategy that has been characterized in the International Relations literature as a "two-level game." However, the manner in which the strategy has been implemented so far may have undermined the very goal of evolving a more performance-based federal resource allocation. Two of the Bank's three "focus states," Andhra Pradesh and Uttar Pradesh, were selected for their clout in national politics as much as for their reform commitment, and have faltered in their Bank programs; only the third state, Karnataka, has come close to achieving its reform goals. Initial central government enthusiasm for selective Bank lending has waned in the face of the strategy's politicized implementation and in the context of increasing economic disparities between states. These findings suggests that India has yet to resolve an internal ideational and institutional dilemma over how to devise a federal resource allocation regime that will encourage high-growth states to achieve their full potential, while at the same time not letting the poorest states fall even further behind---with disastrous consequences for human development. Ultimately, the study suggests that India will deal with this dilemma on its own terms, which the World Bank will be compelled to accept if it wishes to remain engaged in India.