Commentary: Why Indian Reform Keeps Biting The Dust

When the fourth Indian government in three years collapsed on Apr. 17, it looked as though the country was in for another prolonged spell of political chaos. After all, the coalition led by the Bharatiya Janata Party (BJP) fell for no other reason than the bruised ego of the leader of one of its allies. But for a change, the country's swarm of normally quarrelsome parties buried the hatchet long enough to agree to hustle through the annual budget. The business community was elated. "At the most divisive time ever in Indian politics, politicians realize that, after all, it's the economy that matters," says Anand Mahindra, managing director of tractor maker Mahindra & Mahindra Ltd.

If only politicians could deliver what they promise. There is a wide consensus across party lines to push for economic growth and reform. But in reality, governments are regularly obliged to dilute reforms to keep their partners on board. Left-leaning members of the BJP coalition, for instance, shot down plans to hike the price of local phone calls and lower those for long distance. That draws the process out interminably. Since 1991, successive governments have promised, but failed, to open telecom to foreign investors and privatize the inefficient Indian Airlines.

BACK BURNER. Other forceful but controversial reforms that stimulate growth in India, such as privatizing the huge state sector or addressing the budget deficit by further cutting subsidies, end up as potential coalition breakers. So as long as multiparty coalitions dominate Indian politics, as they have done since the Congress Party's 1996 ouster, reform will be stymied by immediate issues of political survival.

Even policies with wide coalition support often bite the dust. The BJP, for instance, nursed along two major initiatives: to privatize the insurance industry and to allow foreign investment in the housing sector. The needed legislation, opposed by labor unions, was supposed to go through India's Parliament in the current session ending in May. But without the BJP in office, passage of the bills is out of the question. "Insurance is very significant, but every time something happens politically, it is put on the back burner," says Lucy Ivimy, fund manager for the London-based Schroder India Fund.

India pays dearly for its failure to implement a steady reform program. "Each time we have a change in government, the credibility of the reform process gets stretched, and we just have to work harder to win investors back," says Subir Gokarn, chief economist at the National Council of Applied Economic Research in New Delhi.

The cost in lost opportunities is immense. While China, for example, is attracting about $40 billion a year in foreign direct investment, India draws a miserly $3 billion. The inefficiencies of India mean that most of the cash takes forever to be disbursed. By some estimates, just one-fifth of the $50 billion in foreign direct investment India has gathered since 1991 has actually been put to work.

India, of course, has successfully made some changes. Since 1996, when the rapid turnover in governments began, it has opened up such markets as consumer goods and energy to foreign investment, rationalized tariffs, and lowered taxes. Such once sacrosanct subsidies as those for food and fertilizers are being reduced gradually. And India has dismantled much of its "license Raj," the complicated--and often corrupt--licensing system for everything from new-

product launches to plant openings.

QUOTA MAZE. There are vast areas, however, where little has improved. Protectionism is still rampant through a complex system of import quotas. Coupled with tariffs of up to 40% on such items as bulk chemicals, quotas distort trade patterns and produce results that penalize India. Bond-rating agency Standard & Poor's Corp. (like BUSINESS WEEK, a unit of The McGraw-Hill Companies) figures that India's trade strategy turns the nation in on itself by favoring domestically oriented business. The ensuing lack of export growth crimps India's ability to service foreign debt and deters foreign investors.

In the long run, India will serve its own economic interests best by joining the global economic system more completely than it has up till now. As domestic liberalizations have shown, Indian business rises quickly to meet the challenge of more entrepreneurial freedom at home. It could be a ferocious global competitor if only governments would set it free.

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