Clearly it’s not happening quickly enough for tens of millions of Indian voters. Last Thursday they united behind the left-leaning Congress Party to unseat free-marketer Prime Minister Atal Bihari Vajpayee, even though he had delivered a whopping 10.4 percent growth rate last quarter on the back of the country’s IT boom and bumper harvests. His Bharatiya Janata Party’s optimistic “India Shining” campaign, it seems, served only to remind the rural and urban poor that the promise of trickle-down wealth hadn’t materialized. “India Shining was good for me,” says a senior executive at a multinational investment bank, referring to a recent surge in investor interest in the country. “But I don’t know if it was good for the Indian people.”
Congress, led by Sonia Gandhi, now faces the challenge of making it so. That means broadening the current boom beyond the high-flying technology and outsourcing sectors, where most winners come from the college-trained elite, to create jobs in cities and especially the countryside. The goal is achievable, if daunting: experts say India has great potential in food processing, textiles and complex manufacturing. But to compete globally and share the wealth more evenly, the country must further deregulate coddled industries, relax rigid labor laws and lower taxes to lure foreign investment, even as it builds infrastructure to sustain an export-led economy.
It’s a tall order and there are real concerns that Congress might be forced to delay–or even reverse–difficult economic reforms in the wake of its upset win, if for no other reason than to avoid inciting populist wrath. “We have come as a cyclone and wiped out the incumbents,” says Jairam Ramesh, who leads Congress’s team of economic analysts. “But can we really fulfill the huge expectations that have come [along with victory]?”
That’s the question now on everyone’s mind. Given the level of frustration expressed by the country’s poorer voters, the new government will be hard-pressed to take strong pro-reform measures immediately, and many of Congress’s coalition partners are still bent on promoting populist policies. For example, the newly elected Congress government in the Indian state of Andhra Pradesh has already announced that it will supply free electricity to its farmers. And Mumbai’s stock exchange shed nearly 330 points last Friday when one Marxist leader told a television channel that the “Disinvestments Ministry [the body charged with privatizing state companies] should be wound up.”
Many business and industry leaders are betting–or at least hoping–that this is more posturing than policy. There’s reason to believe that Congress’s leftist partners may not prove to be as opposed to economic reform as many fear. For example, the Communist Party of India (Marxist) and other small leftist parties, which hold 62 seats in the new Parliament and are key to the Congress majority, have transformed the state of West Bengal into an economic overachiever by opening markets and courting foreign investment. Under communist rule, Kolkata has emerged as a hot technology center to rival Bangalore and Hyderabad. Seated under a portrait of Vladimir Lenin, West Bengal’s chief minister, Buddhadeb Bhattacherjee, recently outlined new manufacturing zones planned for toys, leather and jute, along with a new port facility to be built with private investment. “We are determined to make our state so attractive for investors that West Bengal and Kolkata will soon become the preferred destination for them,” says Bhattacherjee, who began his political career visiting China during the Cultural Revolution to take inspiration from the Red Guards.
Congress itself has not disavowed the reform agenda. India’s liberalization, in fact, originated with a Congress-led coalition in 1991 and was engineered by the then Finance minister, Manmohan Singh, an economist expected to play a leading role in the next cabinet. Policymakers realize the country has gone too far to turn back. “We want reforms to continue,” says senior Congress leader Ambika Soni. “But we also want the fruits of reforms to reach the common people.”
How exactly could they pull that off? The solution, top economic planners have long argued, is to look to the example set by that other Asian giant: China. Under paramount leader Deng Xiaoping, China engineered a remarkable economic and social transformation after jettisoning its Maoist dogma in 1979. The genius of Beijing’s reforms, however, was that they increasingly extended to greater numbers of the Chinese people. Roadbuilding, for example, required wage-earning construction crews who spread their wealth in towns across the country. Once built, new roads, ports and railways attracted foreign investment in factories, creating yet more jobs. Eventually, China’s domestic consumption soared as workers began spending on goods and services, and a white-collar managerial class emerged in coastal cities. To be fair, as Indian reformers have long complained, leaders in Beijing can afford to ignore to a certain degree the short-term pain such changes have caused. Whereas in India, as Vajpayee discovered last week, voters are all too ready to unseat their driver midjourney should the ride prove too bumpy.
But what’s equally clear is that there is no way around the pain: India cannot thrive on its famed tech sector alone, which employs a mere 1 million of the country’s 1 billion citizens. Somehow, despite the risk to powerful constituencies like labor and state-owned industries, India must take the necessary steps to become an internationally competitive manufacturing nation–not merely a service provider. That means exposing industries like aerospace, steel and petrochemicals to the kind of global competition that has toughened the ITsector. It also means reducing red tape and more actively courting foreign direct investment–today India garners a mere $5 billion a year to China’s $50 billion.
Whatever rejuvenation has taken place in India’s manufacturing sector is largely due to the expertise and experience of foreign multinationals, drawn by the glimmer of economic reforms and the Subcontinent’s untapped potential. Hyundai jumped into India’s fast-reforming automotive sector five years ago, investing $600 million in a new manufacturing plant in Chennai; the South Korean carmaker has quickly risen to second place in sales nationally. To attract more such companies, the government needs to put more effort into building power plants, efficient ports and highway networks.
Industry insiders marvel at India’s inability to compete in the types of low-tech manufacturing that China has come to dominate. “The irony,” says B. V. R. Subbu, president of Hyundai Motor India Ltd., “is that we can make missile-grade steel but not good sewing needles.” New Delhi could help homegrown industries not just with greater investment in infrastructure and education but by slashing regulations. According to a new McKinsey & Co. study, India could grab a huge stake in the global textile market once World Trade Organization restrictions are relaxed in 2005, but only if labor laws are made more flexible and mills gain better access to quality fabrics. India’s garment exports could rise by 15 percent to 18 percent a year “and reach $25 [billion] -$30 billion by 2013,” it concludes. Other products where India could do well: pharmaceuticals, chemicals, complex forging, semiconductors and gas turbines, all of which require a skilled work force.
Others discern potential on the country’s patchwork farms. India, a surplus grain grower, processes less than a tenth of its agricultural output, far below the average for Southeast Asia. And the lack of convenient roadways means that crops like spinach often rot before reaching consumers in the cities. A national high-way program–dubbed the Golden Quadrangle–should broaden access significantly, while creating thousands of construction jobs. With proper feeder roads, cold-storage facilities and localized agroprocessing industries, Indian farmers could specialize in cash crops instead of grain, and ignite a “second green revolution,” says economist Ashok Lahiri. “We still eat most oranges by peeling them,” he notes, “but our grandchildren will drink them like you do.”
Paying for all these reforms, of course, could stretch New Delhi’s budget to the breaking point. To succeed, the new government must shed loss-making state enterprises and trim its massive subsidies to the country’s poorest states. Clearly the resistance to any measures that increase unemployment in the short term won’t be insignificant. But here again Congress’s economic reformers should look to the example set by China. When Deng Xiaoping embarked on his country’s transition to capitalism, he initially limited the most progressive, free-wheeling reforms to the country’s special economic zones–the same places that ultimately became the engines for China’s spectacular growth, and models for the rest of the country.
Indeed, the notion of Indian SEZs is already catching on. Investors are expected to approve soon a $1 billion special economic zone of their own near Mumbai. Ravi Parthasarathy, managing director of Infrastructure Leasing and Financial Services Ltd. in Mumbai, says the 1,000-hectare industrial park will be “a country within a country.” With captive power and even its own airstrip, the area hopes to compete for foreign investors alongside China’s coastal cities. “It’s not a question of if people will come, but when,” says Parthasarathy. They had better arrive soon: like any new Indian government, the Congress has no more than five years to show that there truly is a new India rising from the dust of the old.
