Sunday, June 14, 2009

India’s Path to Economic Reform Reaches a Fork

May 14, 2009 -- New York Times -- By VIKAS BAJAJ

MUMBAI, India — In one of the many slick campaign commercials that are airing during this country’s monthlong election, an actor reels off the signature achievements of the governing Congress Party over the last 60 years: independence, land reform, a green revolution and bank nationalization.

The Bharatiya Janata Party, the main opposition, is championing subsidies for a struggling diamond industry and promising to protect farmland against “dubious industrial projects.” One regional party said it would reduce the government’s use of computers to increase employment.

India’s rise as an economic power has captivated many people in the West, but talk of economic openness and dynamism leaves many Indians cold. This year, the global financial crisis has made appeals to India’s traditional socialist-style self-sufficiency even more popular. Policies that seemed increasingly outdated during the fast growth of the past 15 years are getting a fresh hearing, partly because they are seen as insulating much of India from the global slump.

No matter which coalition of parties comes to power in voting that ended on Wednesday — none are expected to win a majority in Parliament — the next stage of Indian reforms will be deeply contentious.

Many in the political class are skeptical that India, after nearly a decade of high growth and rising prosperity, needs more openness to investment, fewer state-owned companies, or greater deregulation of the private sector.

Take banks. The government is the majority shareholder in about 70 percent of banks by deposits. Sonia Gandhi, the Congress Party’s president, has said that the nationalization of banks in the 1960s by her mother-in-law, Indira Gandhi, has “given our economy the stability and resilience we are now witnessing in the face of the economic slowdown.”

In its manifesto, Congress promises that the government will retain a majority stake in state-owned companies.

Congress, which started India on the path to economic openness in the early 1990s, now says it has saved the country from freewheeling capitalism. Many of its rivals claim they would do more. A Communist Party leader, Prakash Karat, who is hoping to form a “Third Front” government in partnership with regional parties, has said that the left, which is criticized for holding India back, has in fact “protected our economy, national sovereignty and the interests of the people.”

Even L. K. Advani, the leader of the B.J.P., the opposition Hindu nationalist party that has been more supportive of free markets, has described the financial crisis as a “clear warning to India” not to emulate Western ways. “India cannot attain prosperity by boosting speculative instincts,” he said late last year according to the Press Trust of India.

Economists and political analysts who favor deeper reforms in India say they are worried by the tone of vindication among those who opposed the country’s fitful embrace of foreign trade and competition in recent years. These people say that Indian politicians seem to have forgotten the high price the country paid in terms of slow growth and unshakable poverty when the government kept the country insulated from the outside world during the cold war.

Many people “don’t quite remember how bad it was in the ’80s when we had tremendous amount of rationing, when it took years to get a car, when it took years to get a phone,” said Raghuram G. Rajan, a prominent economist who recently led a government-appointed panel that proposed financial reforms, including a gradual privatization of state-owned banks.

Mr. Rajan, who issued early warnings about the fragility of the American financial system, added that India could pursue reforms without risking the stability of its economy.

“Markets need regulations and regulators, and regulators need to do their job,” said Mr. Rajan, a finance professor at the Booth School of Business at the University of Chicago.

After several decades of state-led economic planning, a Congress-led government started opening up the economy in the early 1990s when a financial crisis forced policy makers to seek help from the International Monetary Fund. Since then, efforts to further liberalize the economy have come unpredictably, depending on the makeup of governing coalitions in New Delhi and the differing inclinations of regional leaders.

Though India’s strong growth in recent years has won the country’s leaders a measure of respect in the rest of the world, the departing Congress-led government had been slowing down reform anyway. It put off deregulation of financial services and the privatization of state-owned businesses to appease the regional, left-leaning parties it needed to stay in power.

Since the subprime mortgage crisis in the United States set off a global downturn, however, the antipathy toward capitalist excess has only grown. Now, smaller parties that respond more readily to populist demands seem poised to stall liberalization and perhaps even roll back measures, like more openness to foreign investors, if they gain seats in Parliament.

“This crisis provides cover for the Indian politicians to say we were right to be cautious,” said Razeen Sally, director of the European Center for International Political Economy who has been critical of the current government’s record. “It’s not only a danger in India, but across the world.”

But the Indian business establishment appears to be less worried, at least as long as the next government is led by Congress or the B.J.P. and not a coalition made up entirely of leftist parties.

Chandrajit Banerjee, the executive director of the Confederation of Indian Industry, said the populist talk would dissipate once a new government confronted economic realities of slowing growth and falling foreign investment. His group is advocating greater infrastructure spending, changing labor laws to allow businesses to hire and fire workers more easily, lifting restrictions on foreign investment, and streamlining licensing requirements.

“Rhetoric is part of elections,” Mr. Banerjee said. Once elections are over, “what one would see is a very, very strong practical approach.”

Still, Rajeev Chandrasekhar, an independent member of the upper house of Parliament and an entrepreneur, said he was worried that the country would not undertake the next series of reforms until it faced a new crisis.

“The real issue is the leadership of the political parties, and the positions that they take are so stark that they don’t allow for a meeting of minds,” he said. “Sometimes the answer may be that you just have to allow the crisis to develop and use it to push through reforms.”