India

by Shashi Tharoor

  Of course voters will vote for rice at two rupees a kilo if politicians do not explain to them what the other costs of such a giveaway are; but the Andhra elections were a sober reminder to Prime Minister Rao, and to anyone else watching, of the dangerous short-termism that dominates Indian political calculations. The risk of this kind of populist Micawberism is that it could fuel inflation, drive the government to bankruptcy, or both. Parties regularly campaign on pledges to forgive agricultural debt, lower the already highly subsidized costs of water and electricity for farmers, and provide rice (or school meals) to the poor. They have no idea how they are going to pay for their promises, but they make — and even keep — them anyway.

  At least for a while. In July 1996 the Telugu Desam government, which had meanwhile become a constituent of the new United Front coalition ruling in Delhi, raised the price of rice from two rupees a kilo to three and a half, quintupled the subsidized electricity rates for farmers, and instituted a new water tax on agriculture. These politically unpopular steps had become unavoidable because the party’s election-winning measures had drained the state’s exchequer. Now it was the Congress opposition’s turn to decry the Andhra Pradesh government’s “anti-people” policies (short-term opportunism knows no political boundaries).

  For now, the danger is that economic reforms will be supported only by those who stand to gain immediately and directly from it, which by definition is bound to be only a minority of the nation’s population. Many Indian capitalists who feared foreign competition have made their peace with the devil, entering into foreign collaborations and joint ventures that marry their expertise in local market conditions with the entrepreneurial thrust, high technology, management skills, and brand-name recognition of the international firm. (Sometimes the pact is almost Faustian: after a bitter battle with Pepsi-Cola, in which he deployed every conceivable political argument and tool against the entry of multinationals into the soft-drink business in India, Ramesh Chauhan, owner of India’s largest soft-drink company, sold his business lock, stock, and bottle cap, to Coca-Cola.) The graduates of India’s excellent management schools now command salaries their parents would not have dreamed of; service industries catering to the newly affluent elite have created legions of prosperous restaurateurs, bankers, computer technicians, beer-parlor owners, and clothing and interior designers. But all these add up to a pretty small slice of Indian society, and their votes wouldn’t, to coin a phrase, capture a booth in the polls.

  Arrayed against them are the impressive forces of reaction, grouped largely under the banner of economic nationalism. During the years of the Rao government, the right-wing, pro-trader BJP party joined forces with the Communists and socialists to attack the economic reforms on a nativist platform. The slogans of swadeshi self-reliance suited both the right and left parties. Foreign companies, they argued, should not be allowed to make profits by manufacturing goods that Indian companies were already making. Foreign consumer goods, especially such symbols of Western decadence as McDonald’s, Kentucky Fried Chicken, and Coca-Cola, should not be allowed in, they averred, both because they weren’t “needed” by most Indians and because they represented an assault on the values and lifestyle of the nation. Finally, and most potently, they argued that the reforms had also weakened India’s political independence because it had mortgaged the country’s economic policy to the World Bank and the International Monetary Fund — both headquartered, of course, in that arch neo-imperialist city, Washington. (Ironically, the collapse of the Soviet Union and the penury of Cuba has left socialism as a truly authentic Indian ideology, owing no credible allegiance to exemplars abroad.)

  The opportunism of these arguments was manifest in that they were being made by opposition parties who had the least reason to be wedded to the license-permit-quota-subsidy-tariff system entrenched by successive Congress governments. But because the government had seen the light, and taken steps that in the short term were bound to be politically unpopular, the opposition parties saw an opportunity to score short-term political points on the cheap, while sounding self-righteously nationalist in the bargain. Ironically, they were in effect lending aid and comfort to the vested interests maintaining the failures and iniquities of the system, including the nexus between bureaucrats, politicians, and businessmen who paid, patronized, and profited from each other’s ability to manipulate the system for personal ends. (Even more ironically, their position enabled a Congress cabinet minister, Manmohan Singh, to attack the policies his own party had pursued for four decades. “Those who oppose foreign consumer goods companies are enemies of Indian consumers,” he told a press conference during the election campaign in May 1996. “They want people to be content with shoddy goods as for the last forty-five years, and only help smugglers to thrive.”)

  The problem with economic nationalism of this variety is that it is neither good economics nor true nationalism. Its advocates claim to be speaking for India, and in particular for the Indian poor, but the policies they hark back to reduced India’s standing in the world economy since 1947, and did far less to alleviate poverty or to increase the purchasing power of the poor than the liberal-internationalist economics of, say, Indonesia or Malaysia. The stark reality is that rules and restrictions ostensibly designed to protect the poor in fact protected the prosperous and the influential, whereas an open economy that brought in investment and created productive employment (as South Korea, Taiwan, and later China demonstrated) would have brought more people out of poverty than did the “socialist” economic policies followed before 1991.

  A sounder critique of the Rao-Singh reforms, voiced by reasonable left-wing economists (even if that sounds like a contradiction in terms), is that they have not produced the growth they were supposed to, did little to improve the country’s international credit rating, failed to upgrade the technological levels of Indian industry, did not make the huge dents in the unemployment figures that would be their principal social justification, and did not have an immediate discernible impact on the country’s mass poverty. The only answer to such criticism is “give it time,” but Indian politicians, dominated by the expedient and the short-term, and in all too many cases anxious to preserve their deniability should the reforms misfire, have not been saying this with either conviction or consistency.

  At the same time the potency of economic nationalism as a force in India should not be underestimated, as became apparent once again in the hue and cry that erupted over the Uruguay round negotiations of the General Agreement on Tariffs and Trade (GATT), which culminated in the establishment of the World Trade Organization (WTO). Indians fearful that free trade would involve surrender to foreign imperialist interests made common cause with protected industries anxious about new patent rules (notably the pharmaceutical industry, which would no longer be able to copy a Western drug by patenting an alternative process of making it — the product itself could not be patented in India) and were supported by idealists dreading the effects of GATT on the common man (for instance, the end of affordable medication for the Indian poor). Of course many of the fears were exaggerated, but the calls for India to pull out of the treaty were genuine, even if ill-informed (and would have been calamitous for the country, since it would have cost India the Most Favored Nation trading status it enjoys with all WTO members).

  The politically generated controversy over the “Enron deal,” India’s single largest foreign investment to date, illustrates both the opportunism and futility of economic nationalism in operation. The agreement between the Indian state of Maharashtra and a consortium led by the Houston-based Enron Corporation power company to construct India’s largest power project was signed by a Congress government and therefore bitterly opposed by the Hindu-nationalist Shiv Sena and Bharatiya Janata parties, who decried it as a sellout to Western interests. They argued that Enron had received unduly favorable terms from a government that had obtained kickbacks, while Indian consumers would have to pay extortionate rates for their power. Though these cha
rges were unsupported by any evidence and denied by all concerned, the nationalists promptly abrogated the agreement when they swept into power in the state, inviting a lawsuit from Enron and much headshaking from the international economic community, which began muttering about the unreliability of investing too many eggs in such a volatile political basket. Indian attitudes were hardly encouraging: a critic in the Times of India suggested that “India’s status will be enhanced, not lowered, if it tells the world that it is no pushover, no banana republic ready to accept an atrocious deal.” After much chest- and table-thumping, the agreement was quietly restored, with some largely cosmetic changes to enable the new government to claim it had negotiated a better deal than the old one. In the meantime, precious months, and millions of dollars, were wasted; India’s reputation as the next great place to invest in was severely dented (reports said that, as a direct result of the Enron imbroglio, two American negotiations collapsed, and several other Western companies exploring investments in India pulled out); and much-needed power generation for India’s largest industrial state was needlessly delayed, in a country where work-hours lost because of inadequate power generation remains the biggest single drag on productivity. The subsequent collapse of Enron in the US was, of course, seized upon by the domestic left as vindication of their original hostility to the company, even though it occurred for reasons completely unrelated to the project.

  Economic and cultural nationalism combined in the Kentucky Fried Chicken drama, in which the first two Indian outlets of the fast-food chain came under political and physical assault from a coalition of right-wing chauvinists and left-wing farmers. The KFC store in Bangalore, capital of India’s new high-tech software industry (the city and its environs have been dubbed “Silicon Plateau” by ex-Californians), was trashed by a farmers’ mob, which burst in after well-publicized protests and ransacked the premises. Subtler techniques were used in Delhi, where, in response to a legal complaint, the outlet was closed by a magistrate because two flies were found buzzing around the kitchen (many Indians thought an award should be given to KFC for having only two, far below the national average for restaurants). Eventually the police and the courts were needed in both Bangalore and Delhi to overcome such efforts to close the KFC outlets, and both are flourishing, albeit to a limited affluent clientele.

  On the face of it the protests are puzzling, because it is not clear whom KFC hurts: they pay Indian poultry farmers good prices for Indian chickens, cook them in India with Indian accompaniments, and employ Indian chefs and waiters. They will also make a very modest dent in the Indian fast-food market (chicken was already the most expensive nonvegetarian fare, and only a tiny minority of Indians will be able to afford KFC’s menu). The hostility to KFC is less, therefore, about real economic damage to Indians than it is about politics. An American fast-food store is, to the likes of the farmers’ leader Nanjundaswamy, a symbol of surrender to forces he fears: foreign penetration of the Indian economy made literal by foreign penetration of the Indian alimentary canal. The enemies of Kentucky Fried Chicken are decrying not their sales but the sellout, by the Indian government, to Western influences. That is the real reason they need to be taken seriously. But not too seriously, for no Indian government wanting to welcome foreign investment can afford to let its economic policy be wrecked by the excesses of a misguided mob.

  Political caution and nationalist backlash are not the only impediments to effective economic reform. Bureaucratic inertia and some old-fashioned inefficiency have also played their part in the shambolic process of privatizing India’s telecommunications sector, the lack of guidelines on the privatization of infrastructure (especially roadbuilding and power transmission and distribution), the failure to inject speed into bankruptcy proceedings (three bankruptcy cases recently marked their fiftieth anniversaries in court, a golden jubilee for the law firms concerned, but a disgrace to the legal system), and avoidable delays in clearing new projects for investment. Legal reform, and an Indian equivalent of U.S. vice president Gore’s regulation-slashing program of “reinventing government,” are essential if the reform policy is to succeed.

  The new telecommunications saga was worthy of the C. M. Stephen days. The government learned little from its attempts in 1992 to privatize cellular-phone service in four major cities, which had ended in court after controversies over the process for selecting the private operators who would provide the service. In 1995, tenders were issued for privatizing basic telephone service in twenty zones across the country; after the bids were opened, the rules were changed, limiting the number of zones each company could have, and then highly unrealistic minimum price levels were set, which took a number of major firms out of the bidding (in eight of the twenty zones, no bids were received at all). A friend representing a German telecommunications company in Delhi was in despair about the unpredictability and irrationality of the process: decisions about telecoms privatization were being made by officials who, he said, didn’t have a clue either about telecoms or about privatization. Parliament erupted in an uproar about alleged corruption involving the then minister of communications, Sukh Ram; in August 1996, when he was out of office following the Congress Party’s defeat in the elections, the police found a million dollars in Indian rupee notes in two of his residences, and Sukh Ram himself, appropriately enough, went out of communication range by disappearing abroad. Meanwhile, the telephone system remained unreliable and out of date, and more potential investors packed their bags and decided to look elsewhere.

  * * *

  The United Front government that replaced the Congress in 1996 (after an eleven-day interregnum while the Hindu-oriented BJP party unsuccessfully sought coalition partners) surprised many, given the dominance of the thirteen-party coalition by socialist and other left parties (including two Communist parties), when it did not repudiate the economic reforms. The Congress party had pledged, in Manmohan Singh’s words, to “expand liberalization, involve the private sector in infrastructure development, cut the fiscal deficit, reform the insurance sector and the tax structure, and cut government expenditure,” a program staunchly opposed in the platforms of the parties constituting the United Front. This suggests that the liberalization of economic policy is indeed, as Prime Minister Narasimha Rao used to aver without conviction, irreversible. Indeed, the fact that practically every Indian political party of any consequence has run or is running a state government somewhere has injected a harsh dose of economic realism into the thinking of the national political establishment. In Delhi, their role was to oppose; in the states, their task was to govern. So they all know, from direct experience, that private investment, both domestic and foreign, is essential because both national and state governments are broke and cannot afford to go back to the bad old ways. (Indeed, the hospitability of the Communist state government in West Bengal to foreign private capital is now a byword, though the annual trips of its aging Marxist chief minister, Jyoti Basu, to England and the United States “to promote foreign investment in West Bengal” may have more to do with his wish to escape the heat of the Calcutta summer than the persistence of neo-imperialist interest in his states investment climate.)

  Nonetheless, the indications from Finance Minister P. Chidambaram’s carefully balanced first budget are that the economy will be opened only slowly, and that the political costs will be carefully measured in doing so. There were several positive signs that cheered the reformers, including tax cuts (in capital gains, as well as in import and excise duties) aimed at generating economic growth of 7 percent and attracting five times the level of foreign capital than ever before — an estimated $10 billion. If this seemed unduly ambitious, the government struck an encouraging note by clearing $1.7 billion worth of foreign investment proposals just before the budget was declated. Due emphasis was, for the first time, placed on infrastructure development; agriculture and the basic services were also declared to be priorities. But that was the extent of the good news. A new minimum tax on companies previously ex
empt (a tax largely justified both by the government’s revenue needs and by the fact that legal loopholes had brought corporate taxes as a proportion of pre-tax profits down to a record low of 14 percent in 1995-96 from nearly 30 percent three years earlier) rocked the stock market; a surcharge applied on all imports offset the impact of some tariff cuts and effectively raised the maximum tariff rate to 52 percent when it had been expected to be lowered below 50 percent; and total public-sector borrowing remained above 10 percent of GDP. With new subsidies to state governments, the budget deficit remained high and the treasury seemed likely to have to meet interest payments to the tune of 47 percent of all government revenue (the figure had stood at 39 percent when the last government took office in 1991).

  The new national consensus on economic reform is beset with what some see as compromise and hesitation, and others judge as political wisdom: liberalization yes, politically painful dismissals and cuts no. The much-touted “exit policy” of the early reform period — the intention of closing down unprofitable public-sector firms and laying off unproductive personnel — shows no signs of being implemented; the “entry policy” — letting in more foreign investment and increasing imports while lowering tariff barriers — continues, but more warily. Populist subsidies will continue, which means that budget deficits will not be reduced. (The wisecrack about deficits in New Delhi’s political circles is that “any government that lives within its means lacks imagination.”) The real problem with deficits is not the external balance of payments (which, through sensible exchange-rate management and a modicum of fiscal discipline, does not appear likely to become critical in the foreseeable future), but the domestic expenditures arising from internal political constraints. When Mr. Chidambaram briefly suggested that public-sector firms would have to justify their existence by contributing a minimum dividend to the national exchequer, he was forced to back down by howls of protest from his coalition partners.