Operation Clean Hands, Indian Style?

A corruption case could backfire on the ruling party

India's bold program to transform its socialist economy and attract huge flows of foreign investment is in limbo. The government of Prime Minister P.V. Narasimha Rao, weakened by losses in local elections to the nationalist Hindu opposition, has been stalling on key economic reforms, and new investments have dropped in the past several months. Economic growth of 5.5% lags far behind the double-digit pace of China, Asia's other giant.

That's why all eyes are focused on a blockbuster political corruption scandal dominating the headlines. Several officials from Rao's ruling Congress Party have been charged, but the biggest casualty so far has been the leader of the opposition Bharatiya Janata Party (BJP). Could it be that Rao might be able to discredit his enemies and win a clear shot at power in the general elections scheduled for April?

Don't count on it. Although the Congress Party appears to have gotten a boost from charges in a $19 million bribery case involving officials from almost all of the major political parties, many observers believe it still cannot win a parliamentary majority. A coalition government with the BJP, which helped stall a big power plant that Enron Corp. is building in Maharashtra state, would be the likely result.

DAMAGE CONTROL. Such a government almost certainly would not be able to move ahead on telecommunications, power, and financial-market liberalization. "A clear majority for either of the two parties is preferable," says Ashok Desai, managing director in India for Silicon Graphics Inc. "A coalition will definitely slow down the reforms."

By taking advantage of the scandal, Rao is trying to blunt the Congress Party's corruption-tainted image. Three Congress Cabinet ministers were implicated, but so were seven politicians from other parties--including L.K. Advani, the leader of the BJP--on charges of money-laundering and influence peddling. The charges have been brought by the Central Bureau of Investigation, but most political observers see the hand of Rao at work: The case was sitting around for five years before prosecutors took action just weeks before the election. "He's trying to level the playing field," says S.D. Muni, professor at Jawaharlal Nehru University in New Delhi.

The BJP's Advani is accused of taking $175,000 in bribes from businessman Surendra Jain. Advani, who resigned his parliamentary seat, is proclaiming his innocence. But a few days after the charges were announced, he was heckled at a BJP rally in western India. His part in the scandal dilutes the BJP's plan to project itself as a clean alternative to the long-ruling Congress Party. Moreover, the January decision by the BJP-led coalition government in Maharashtra to restart Enron's controversial power project may cost the BJP political mileage on its platform of economic nationalism.

But the corruption case could boomerang on Rao. Analysts say now that the lid is off, Rao will have little control over where the investigation leads. The CBI is expected to charge more politicians, including additional members of Rao's Cabinet. Rao is getting dragged in, too. The BJP is accusing him of taking $1 million in bribes from Jain--a charge which Rao denies. "Everyone has been hurt by this," says Charan Wadhva, an associate at the Center for Policy Research, a think tank in New Delhi.

SCANT RELIEF. That's why a coalition government is all the more likely. If Congress has to share power with the BJP, the picture for business could be grim. On its own, Congress has already had difficulty pushing through tough reforms. Telecom privatization has gotten bogged down, and the government has been reluctant to move on such ideologically charged issues as privatizing state-owned companies and changing labor laws.

Companies that have already made the plunge into India are unlikely to pull out after the election. Moreover, investors who have made a commitment for projects in India, like the automotive industry, seem ready to plow ahead.

But few can foresee a coalition government that would be sturdy enough to make the next round of major decisions. Moreover, even after the April elections are finished, few India watchers have much hope that any government will seriously attempt to clean up the country's widespread corruption. So for investors waiting for real change, the coming months are unlikely to provide much relief. That could prove damaging to India's aspirations to become Asia's latest economic success story.

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