India's New Government May Be Steadier Than It Looks

It has already cut red tape and won fans in the finance world

Just over three months ago, India went to the polls with high hopes for a vibrant new central government and instead got an ungainly coalition of free-traders, Marxists, and regional parties. With a miserable record at coalition rule--three attempts have failed since 1977--pundits predicted that the fragile minority government would implode within 18 months.

For the most part, the odds have been on the doomsayers' side. Intraparty tension is high. The annual budget, released in July, contains no bold reforms, and the Bombay Stock Exchange has since dropped 10%. Key decisions on privatization and foreign investment have been shunted off to study commissions.

Still, some political experts, business leaders, and longtime India-watchers are saying that the conventional wisdom may be wrong and that the United Front government under Prime Minister Deve Gowda may have more life in it than first thought.

The coalition has been remarkably decisive in some areas. Although several foreign power companies sought to invest during the Rao government, not a single megawatt of new electricity was produced. In its first two months, the UF has cleared two major power projects, by Enron Corp. in Maharashtra and Cogentrix Inc. in Karnataka. The restructured Foreign Investment Promotion Board also has cleared out its backlog by approving 480 applications by foreign companies seeking to do business in India.

The newly appointed Finance Minister, Harvard business-school grad P. Chidambaram, has won plaudits from the financial community. His ability to satisfy conflicting economic demands by deftly increasing subsidies to farmers while lowering tariffs on items such as electronic equipment and granting tax breaks for infrastructure investment has raised the spirits of business leaders looking for signs that liberalization will remain on track. "I think it's reassuring," says Tim Lovell, executive director of Bombay-based Birla Marlin Securities Ltd.

India watchers say that what really matters will happen behind the scenes, anyway. The Finance Ministry, for example, revealed two weeks after releasing its budget that it hopes to open India's insurance market to foreign investors in 1997. Some believe Chidambaram will next tackle deregulation of banking and securities and later India's confusing and punishing tariff structure. Says Francis Pike, managing director of Peregrine India: "[Watch] what happens in small, surreptitious moves--the drip method."

One upcoming event could reveal far more about the coalition's chances of survival than its record so far. In October, Uttar Pradesh, India's largest state, will choose a ruling party, and early signs are pointing to a possible win by the Hindu nationalist Bharatiya Janata Party. A BJP victory would almost certainly drive the awkward United Front coalition closer together, less out of common cause than in opposition to the BJP's crusade. In May, the BJP won 20% of the votes in national elections and tried to form a new government. But its strident anti-Muslim, pro-Hindu message scared away possible allies, and the government collapsed after 13 days.

STRANGE BEDFELLOWS. More important, a BJP win in economically depressed Uttar Pradesh could force the Congress Party and the United Front into each other's arms. The Congress Party had ruled India for most of its 49 years since independence but was roundly defeated in May, and some of its leaders are now mired in a series of scandals. Yet the party still holds 25% of the seats in Parliament--a bloc the United Front depends on to keep its tenuous grip on power. "A BJP win will only increase the longevity of the United Front," predicts UF spokesman Jaipal Reddy. "The non-BJP people think they'll be guillotined if there's another election."

True, numerous pitfalls await the United Front. One is the possible naming of former Prime Minister P.V. Narasimha Rao in a fraud case brought by a businessman. This could drive a wedge between the coalition and the Congress Party at a time when they need each other. For now, the gawky United Front isn't winning any prizes for audacity, but somehow, it seems to be managing its contradictions.