Progress And Promise In India

Progress and Promise in India by George K. Tanham For decades, India was widely seen as a nation with enough potential to become one of the world's great powers if it could only get its act together. The task of developing a modern economy following independence from Britain in 1947 was enormous. Poverty, explosive population growth, primitive ways and the absence of financial resources were all-too-apparent impediments. But India possessed great assets as well: democracy -- the largest on earth -- ample leadership talent and a powerful national will to be independent economically as well as politically. Jawaharlal Nehru sought to make India a prosperous, self-reliant nation based on socialism, one which would play a major role in world affairs. Yet India so far has failed to live up to its promise or to its own aspirations. With few interruptions, democratic power in India since independence became a family affair. The prime ministership and leadership of the dominant Congress Party passed from the founding fathers, Mahatma Gandhi and Nehru, to Nehru's daughter, Indira Gandhi, then to Indira's son, Rajiv. The murder of Rajiv during the political campaign of 1991 ended more than four decades of domination by the Nehru dynasty. By then, India had started to shake free of its lingering, debilitating love affair with socialism and its partnership in global affairs with the declining Soviet Union. The struggle for political and economic reformation, which began in the 1980s, has marked the 1990s. There is as yet no economic miracle to report, but in the last few years India has made some real progress, and the future once again is starting to show some promise. Several major events made 1990-91 a pivotal time for India. Each had its origin in rigidities afflicting the Indian body politic and economy, and each interacted with the others to produce an historic moment. The elite steering India for nearly half a century could no longer ignore the warning signs of systemic crisis. The Signs of Systemic Crisis The first event came in the form of fiscal crises resulting from rising deficits in the balance of payments and in the public accounts. India's robust growth during the late 1980s had, if anything, overshadowed and exacerbated rapid import growth and public overspending. The size of internal public debt triggered a rapid rise in inflation. Meanwhile, the centralized, regulated economy -- chronically bled by public enterprise losses -- staggered into more debt with no improvement in efficiency. By the spring of 1991, foreign exchange reserves had dropped to $1.1 billion, or approximately three weeks' supply. By April, the margin had narrowed further and India faced the real possibility of defaulting on its sovereign obligations. Would-be guarantors of new credit, such as the Bank of England and the Bank of

Japan, demanded assurances that India would ship gold to secure new loans -- a major humiliation for the Indian elite. Quick assistance from the International Monetary Fund (IMF) averted insolvency but served only as a stop-gap measure. A basic review of the country's entire economic direction became imperative. Another crucial event occurred abroad. The Soviet Union -- India's friend, treaty partner for two decades, defense supplier, diplomatic supporter and major trading partner as well -- tottered and, in the summer of 1991, collapsed. The impact on India was felt in trade and foreign affairs but had profound domestic implications as well. Nehru, the country's first prime minister, regarded the Soviet Union as the world's best economic model for India and other developing countries. His view became predominant among the country's senior administrators and carried over through them into his daughter Indira's tenure. But by the late 1980s, the Soviet "model" lost its following and, in August 1991, it disappeared altogether. So, too, had the Soviet Union's important residual function as a market for India's commodities and cheap consumer durables. The unwieldy ruble-rupee trading account -- in which Soviet imports bought defense equipment, oil and some nuclear expertise -- was no more. After 1971, the Soviet Union supplied about 75 percent of India's military equipment at bargain prices. The absence of this important source of supply and support was a major blow to the country's sense of security. In 1990-91, India also experienced a crunch in its foreign relations. The Gulf crisis, and the UN-sanctioned war against Iraq, which resulted from Baghdad's invasion of Kuwait in August 1990, put India in an impossible position. Iraq's Soviet mentor was distracted and disintegrating. India's realpolitik stance favored Iraq and it's lack of influence had never seemed more glaring. Meanwhile, the domestic situation in India was becoming unsettled by 1990. In August, the minority government of Prime Minister V.P. Singh provoked caste tensions when it proposed to set aside quotas of government jobs for various socalled "backward castes" -- a proposal shelved in the early 1980s. At the same time, the Hindu nationalist Bharatiya Janata Party (BJP) renewed its campaign to demolish the Babri Mosque at Ayodhya in Uttar Pradesh and to build in its place a temple honoring the birthplace of the Lord Rama, the mythological hero of Hindu gods. The BJP during 1990 conducted a highly charged procession toward Ayodhya through several north Indian states. More Violence and Tensions As if this were not enough, violence erupted in Kashmir the day V.P. Singh's government took office in December 1989. An insurrection, aided covertly by Pakistan, took hold, prompting Singh to send hundreds of thousands of regular and paramilitary troops into the Kashmir valley, where they still are. Soon after,

the Singh government ran afoul of Sikh separatists in the Punjab, where violence escalated throughout 1990. New challenges to Delhi's authority in Assam also emerged that same year. Singh's minority government fell in mid-1990 and was followed by one with an even smaller minority -- only 52 of parliament's 525 seats. Led by an able opportunist, Chandra Shekhar, the new government held office only because the Congress Party, still India's largest political force, permitted it to do so. Shekhar resigned in February 1991 and elections followed. It was during the campaign that Congress Party leader Rajiv Gandhi was assassinated -- further weakening the political condition of the country. The elections, delayed by Rajiv's death, gave the Congress Party the largest number of seats in the Lok Sabha -- but not a majority. Once more, either a coalition or minority government -- another weak government -- had become a necessity at a time when India urgently needed strong leadership. Yet the rush of events had a profound and lasting effect on the country, freeing India of domestic socialism and a foreign policy based on friendship with the Soviet Union. The financial and economic crisis pushed India to reform and liberalize the poorly functioning economy. The collapse of the Soviet Union, and the Gulf crisis, which cut off important foreign exchange remittances from Indian labor working in the region, added urgency to the need for economic liberalization. Also, they compelled India to realize that it required a truly nonaligned foreign policy which included expanded relations with the West and the U.S. India now would need capital and aid from the West. The situation in the summer of 1991 called for decisive leadership. In June 1991 after the elections, Narasimha Rao, an old, seemingly placid Congress Party veteran who had served as Indira Gandhi's foreign minister, was selected as Prime Minister. Rao was seen by most observers as something of a caretaker while the Congress Party searched for a more decisive leader. To the great surprise of most Indians, however, Rao immediately took charge. One of his first acts was to appoint Manmohan Singh, an economist with experience in the international arena as well as on the domestic scene, as his Finance Minister. Rao instructed Singh to free the economy from the shackles of centralized regulation and bureaucratic control. Singh seemed to be waiting for the job. He launched a comprehensive drive to balance the budget and to reform the entire economy. Rao presided over a minority government and had to proceed cautiously, but decisively, to deal with the crisis. The IMF and the World Bank were insisting that the debt and inflation had to be controlled, and that a fundamental restructuring of the economy must be undertaken with particular emphasis on removing regulations and bureaucratic controls.

The Rao administration tackled the fiscal problem. It devalued the rupee some 20 percent, then took steps to reduce the deficit by reducing expenditures and increasing revenues. It eliminated all export subsidies and most subsidies for fertilizer and sugar; it also cut some subsidies for public sector enterprises (PSEs). Cutting defense was difficult, given the security situation in India and Kashmir. Even so, Rao's government modestly reduced defense spending. The government reduced capital expenditures and money transfers from Delhi to the states. On the revenue side, the government revised the tax law and made tax collection more efficient. As a result, tax receipts are up about 25 percent. Indians were induced to put their financial holdings in banks which could use the funds for productive purposes. (Indians traditionally save by hoarding huge quantities of gold, estimated to be as much as $200 billion in bullion and jewelry.) Import duties were reduced. The sale of limited portions of stock of the PSEs also produced one-time gains. All of these measures have contributed to progress in reducing the debt and reducing inflation. But greater fiscal discipline is needed. This became very clear at a meeting of the IMF and the World Bank in September 1994 in Madrid. The bankers complimented India on its reforms but also expressed serious concern that inflation, debt and deficit reduction had not met their goals. Inflation hovered around 9 percent in early 1994, but was 11.5 percent in early 1995, and the deficit was climbing back to 7.3 percent of the gross domestic product (GDP). Structural reform is also required to produce the growth desired. The purpose of such a huge undertaking -- a thorough overhaul of much of the public and private sectors of an economy with a GDP of about $300 billion -- would be a complete turnabout from 45 years of central economic control. The states have important power and some have been slow to reform, which accounts for some, though by no means all, of the delays in implementation. Inadequate Infrastructure Reform in industry regulation has been important. With only minor exceptions, barriers to private firms entering markets have been removed. Industrial licensing has been abolished except for a few designated areas, and the number is being reduced. Imports of capital goods for de-licensed companies with foreign equity invested in them receive automatic approval. Automatic approval for foreign investment up to 51 percent of an enterprise is allowed in all but 34 industries, and the number of exemptions is being reduced. Even so, approval can take time and, as one nonresident Indian (NRI) noted, a "fixer" is still very helpful. Foreign trading companies primarily engaged in exporting are eligible for automatic approval of up to 51 percent equity. There are special incentives for investment in the oil, power and electronic sectors. Some tax relief and subsidies

are also provided by state governments to investors. The securities markets have been liberalized for institutional investors. Special privileges were provided for NRIs to invest in India. The government has moved slowly on the Indian infrastructure, which is in poor shape. Foreign companies are being encouraged to build toll roads and to invest in the power sector. The telecommunications sector also has serious problems which the government may finally have sorted out. A new policy announced in September 1994 provided that private foreign companies registered in India would be allowed to bid on contracts but only in local telephone markets. While some companies say they can live with it, many feel there is too much confusion over the policy and the implementation. Trade reform is as important as deregulation of industry. Indian tariffs, among the highest in the world, are nearly twice as high as those of the country's neighbors. But in his budget message of 1994 the finance minister promised to reduce tariffs to 25 percent, a goal that has not yet been reached. The rupee is now convertible for trade and relatively stable. The trade imbalance, however, worsened in 1994; imports grew 24 percent while exports grew only 17 percent, though for the time being, the government is not too concerned about this imbalance. The agricultural sector, which has been doing well, has largely been ignored though some efforts have been made to improve performance. Cuts in agricultural subsidies have been bitterly opposed. India, now self-sufficient in grains, has become an exporter and after seven good monsoon seasons has a reserve of 30 million tons of grain; the reserves and reduced exports would see the country through a bad monsoon season. Cotton, sugar, plant oils and food production are up. New seed varieties with a 25-percent increase in potential grain yields have been announced recently. India's Green Revolution is spreading. The main problem in agriculture is that large and middle-size landowners have profited most and the poor remain poor. The government has been slow to reform the financial sector, largely because of very powerful unions in the banking system and the effect reform would have on the poor. The government has relaxed restrictions on nationalized banks, prodded them to become more competitive and encouraged the use of modern technology. But until now most nationalized banks have seen their mission as one of helping the poor, not of operating profitably. Losses do not seem important as the government always covers them. However, these banks are under pressure to become profitable while still serving the poor. The unions are opposed to the introduction of new technology and methods in banking. The nationalized banks, because of detailed government oversight,

inflated staffs and lack of competition, do not function efficiently and provide poor service. They have been a drain on the government exchequer. However, there are some encouraging signs. The unions and the Indian Bank Association, representing bank management, appear to have worked out an agreement to increase wages and benefits and to improve pensions. In return, the unions are discussing increased productivity and better service. Competition is increasing pressure on the national banks to improve their performance. Privatization of several hundred PSEs or closing down the most unprofitable remains the most difficult problems for the government. It has privatized only a few public-service enterprises and sold some shares in the more profitable ones. But privatization is bound to create massive layoffs. The government must, but has not so far, provided for some employees to retire and others to be retrained or redirected to industries in need of workers. There will be enormous economic strains involved in raising the funds needed for an "exit policy" and political problems for the government if it creates extensive unemployment. It is likely that privatization will be slow until after the national elections required by 1996. From the beginning, the government's major goal has been to improve the welfare of the people. There are millions of acutely poor Indians with inadequate resources to improve their lives. Through education, health services, infrastructure, land and credit, the government wants to help them. Realizing such ambitious objectives on a massive scale would require funds in amounts that are not available in today's stringent budget situation. Yet the government is convinced that a healthy private sector in the long run will provide additional funds for social welfare and more and better jobs for the poor. In India -- a functioning federal parliamentary system with a free press, free speech and an independent judiciary -- democracy has proven to be both a strength and a weakness. Democratic agreement and consensus are strengths that provide a solid base for government and reform. But the democratic process is slow, often indecisive and can be cumbersome when important decisions must be taken. Population Grows The population, now at 911,000,000, remains one of India's greatest problems and the government is aware that it must be dealt with. Birth control failed and has had a bad name ever since a terribly unpopular government program to force sterilization was abandoned in 1976. Population growth varies from state to state, with the poorest states -- Bihar, Rajasthan and Uttar Pradesh -- having the highest growth rates, and the more progressive and prosperous -- Kerala and Tamil Nadu -- having the lowest. In Kerala and Tamil Nadu, in fact, affluence seems to have brought birth control with it; the population growth there is zero. With that powerful example, there's hope that the spread of affluence will eventually solve the problem. Even so, pressures for more immediate and direct

control measures continue to be brought to bear on the hard-pressed Rao government. Nevertheless, India has made economic progress in the last three-and-a-half years. Most private industry has been freed of restrictions. Industrial production increased about 14 percent last year. The rupee has become more fully convertible and indeed has become stronger. If it gets too strong, Indian products could lose their low-cost advantage in foreign markets. In any event, the fiscal condition today is striking in contrast with the almost unmanageable situation a few years ago. Private Indian companies and the Indian treasury have no trouble now raising money in the world capital markets. Exports rose a handsome 20 percent in 1993. Private investment, including funds in the stock market, rose to $4.7 billion in 1993. U.S. firms, in fact, invested more in India in 1993 than in all 47 years since independence. The GDP grew slowly in 1993, about 3.8 percent, but the Finance Minister hoped to report 5 percent in 1994. Solid progress is beginning to show in other ways. India paid off $1 billion to the IMF in April 1994, well ahead of schedule. The deficit has been reduced to approximately 7.3 percent of GDP though it is more than the IMF and World Bank targets. India has approved the GATT with its provisions for free trade and protection for patents and copyrights. Other indicators of progress towards reform are seen in the number of new financial journals that have appeared recently in the major cities. Airlines that avoided India or had discontinued flights there are again operating to India. The country has the largest number in Asia of investors in the stock market. In early 1995, the Rao government appeared weak, divided and indecisive. The loss of several state elections hurt. Critics say the elections were a repudiation of the government's liberalization efforts and Congress corruption, but local issues and populist promises seem to have been the causes. Five state elections in early 1995 hung heavily over the government. Many Indians saw the Rao government's days as numbered though others felt that Rao, a great survivor, might not be brought down. In any case, the current political situation threatens Rao's liberalization policies and provides critics with the opportunity to attack them. Many businessmen, large numbers in the young middle class and others have taken the position that the reforms are now a national policy, not just the policy of one party. Most parties now support the general thrust of the reforms, though they may differ in certain aspects of it. The recent visits to India of Prime Minister Goh Chok Tong of Singapore, his second in a year, and of Secretary of Commerce Ron Brown from the U.S. have indirectly supported the notion that reform is a national policy. Both urged India to undertake more reform, reduce negotiating time, increase transparency in negotiations for contracts and move more quickly.

Prime Minister Rao says that his country will proceed at its own pace but that the reform movement will definitely continue. The country seems to favor it. India, from all appearances, is beginning to take off, and the liberalization underway may well be irreversible. Over the next few years, India should become a powerful, growing economy with an increasingly strong voice in the world economy and, indeed, in world affairs. George K. Tanham ('73), a retired executive and trustee of Rand Corp. and a current Rand consultant, is an Asia specialist who has served in AID and diplomatic posts in the region. The author of several books, he has written a study of India, where he spent several months during the winter