New Delhi Is Up And Running At Last

Lame duck or no, the government is deregulating at top speed

It seemed as though India's slow pace of handling routine government business might grind to a complete halt. After all, the Bharatiya Janata Party coalition of Prime Minister Atal Behari Vajpayee became a lame duck after losing a confidence vote in April. New election results won't be known until October. And in recent weeks, India has gone to the brink of war with neighboring Pakistan over Kashmir.

Surprise. The BJP has whipped itself into action. Finally freed from a paralyzing fear that it would fall, the government has gotten down to business. Ministries and agencies covering everything from telecommunications to broadcasting are actually making the deregulatory moves the economy needs. In the month to mid-July alone, the government has approved nearly 150 foreign investment projects worth $300 million, cleared a $2.3 billion privatization plan, simplified the tortuous telecom licensing system, and promised to issue operating permits to more than 300 private radio stations. "The government can actually do something because it's not afraid of the consequences," says Joydeep Mukherji, associate director of sovereign ratings at Standard & Poor's Corp. in New York.

"GOOD" POLICY. The government's biggest achievement by far is sorting out the telecom policy. The system was technically deregulated some time ago. But investment almost came to a halt because New Delhi required private telecom operators to pay up-front fees of up to $6.3 billion for the right to build and operate networks. Such weighty operators as BCE Inc., formerly Bell Canada Enterprises, left India in disgust last year. But in late June, Vajpayee unveiled a 20-year revenue-sharing policy, releasing operators from burdensome fees. "There are still pulls and pressures by operators, but by and large the telecom policy is good," says Hemant Luthra, CEO of Bombay's Essar Telecom Ltd., which won a license to operate in Punjab.

Foreign investors are plenty pleased, too. Kodak Polychrome Graphics of Norwalk, Conn., applied to set up a $1.5 million, wholly owned subsidiary. Although its color-imaging technology could save Indian printers and publishers money on expensive imports, Kodak heard nothing for six months. The deal was finally approved on June 27. "The best thing to happen to the country is that the caretaker government is [now] independent of the pulls and pushes of its partners," says Country Manager M.N. Varadarajan.

NEW HIGHS. Some of the recent decisions could unlock substantial inflows of foreign cash. IBM, which has operations in Bangalore and New Delhi, applied on June 2 to buy out its software-development and service joint venture with the Tata group for $10.8 million. The approval, speedily passed on June 28, "paves the way for many more such [IBM] initiatives to come to India," says V. Vishwanath, vice-president of Tata-IBM. All this is big news for portfolio investors as well. The Bombay Stock Exchange's Sensex has hit record highs, up more than 50% since the BJP fell in April. Since then, investors have poured $850 million into Indian stocks, after selling off $350 million worth in 1998.

There's a catch, though. India's Parliament was suspended when the coalition fell. Many government decisions, such as liberalization of the telecom and radio sectors, still need

approval by Parliament when it reconvenes after fall elections. "A new government can change our policies," says BJP spokesman K.L. Sharma. It has happened before. Successive state governments overturned the approval for Houston-based Enron Corp.'s 2,400-megawatt power project in western India in 1995, delaying the project by several years. But that's unlikely this time: The opposition Congress party, while warning of looming fiscal crisis, says it will liberalize more.

While the caretaker government has achieved more than expected, there is still work to do. The telecom sector doesn't have an independent regulator or enough access to the estimated $50 billion in capital needed for a first-class international network. Radio might be privatized, but foreign investors can hold only 20% of private stations. And state-run radio still has a monopoly on broadcasting news and current events.

So it's too early to give the BJP top grades for reformist zeal. But the party's actions are proof of the resilience of India's rambunctious political system, which seems to do best in troubled times. After all, the country first liberalized after a foreign exchange crisis in 1991. Maybe the crises of 1999 will yield some enduring benefits.

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