India: Reform or Bust

A bribery and corruption scandal that could bring down India's government may look like just another Asian scandal. But this time a lot more is at stake. A government collapse could set back the nation's best chance for economic reform in a decade, and with it may go any hope of bringing in desperately needed new foreign investment. If that happens the nation could lose another decade, as in the 1990s, when China attracted 20 times as much foreign investment as India.

Videotapes showing bribes totaling about $23,000 being paid to two top leaders of the ruling Bharatiya Janata Party have thrown a huge political wrench into an ambitious economic reform plan by the nation's Finance Minister, Yashwant Sinha. He was planning to accelerate privatization of government-owned businesses, increase labor reform, cut taxes and tariffs, and force down government-mandated interest rates. While most of the reforms were aimed at fixing India's domestic economy, they also were designed to show overseas investors that, after a decade of false starts, there was a fundamental commitment to remaking the world's second-largest nation. The high-tech magnet that draws many investors to visit the famous software capital of Bangalore has greatly enhanced India's image. But information technology accounts for only about 1.5% of the Indian economy. Government officials were hoping to use their high-tech prowess to show the outside world that Indian business was now ready to deliver high growth in other parts of the economy, from telecommunications to power generation to manufacturing.

Two key reforms are critical: privatizing a number of big state-owned companies and allowing businesses of 1,000 employees or less to set their own hiring and firing rules. Despite the bribery scandals, if India wants to truly hang out an "Open for Business" sign, it must send a signal now.

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