A New Tiger - Part One of a report on the changing political economy of India
By THOMAS G. DONLAN of BARRON
January 31, 2005

TWO WEEKS IN INDIA IS only enough to convince a visitor that he knows almost nothing about that vast and infinitely complex country. But interviewing officials and businessmen during a two-week visit to Delhi, Bombay and Bangalore also produces some tentative observations and judgments about India's future.

India is most commonly compared to an elephant: A lumbering, ponderous beast, immensely strong and yet cooperative, easily trained and led. The comparison is apt for India's socialist past, but not for the capitalist, globalist economy some Indians are building for the future. India is becoming another kind of nation -- the latest Asian Tiger.

Mahatma Gandhi inspired the spinning wheel at the center of the Indian flag. To him and his followers it was symbolic of the simple virtue of rural life, and also symbolic of independence from the British trading system that they believed exploited Indians and destroyed the country's industry by selling them cheap goods manufactured in England.

Jawaharlal Nehru might have put the steel mill on the flag. Educated in Britain at a time when all the best minds believed in state control of industry, the first prime minister of independent India created state industries in steel, transport, energy and all the other key sectors. Structured as job programs as much as businesses, these industries were woefully inefficient from the start. Like most socialist enterprises, they ate up India's seed corn. And like most socialist governments, India regarded it as a point of national pride to refuse foreign private investment that could have created much more wealth.

Indian politicians and writers frequently recall that Gandhi told his people they would never be free until the last tear was wiped from the eye of the last poor person. And Nehru said, "The service of India means the service of the millions who suffer. It means the ending of poverty and ignorance and disease and inequality of opportunity."

But in concentrating on jobs programs and on relief of the poor through government programs of free health care and free public education, India ignored economics and came close to shunning economic growth as immoral.

Dismal Experience

The Indian experience in the first 30 years after independence was dismal. Even with the growth of heavy industry, poverty did not go down and total employment did not keep pace with population growth.

There were successes, however. Government education programs increased literacy, both in local languages and in English, and enthusiastic expansion of universities expanded the supply of engineers and economists. Unfortunately for the graduates, the government's heavy hand of guidance on business suppressed the nation's ability to make use of an educated workforce. Government make-work programs did not absorb the supply of skilled workers, many of whom had to take their skills overseas to use them.

Popular disillusionment fostered a populist response. A rapacious class of political leaders concentrated on an Indian version of the spoils system, using the power of the state for patronage and political power. This second stage of political and economic development was effective, but it was even less productive than the first stage, and it brought India to its economic knees in 1991.

Manmohan Singh, a political novice, came to the finance ministry at the crisis point, and began a new independence movement, beginning to set business free of the government. His tasks included permission for private competition for government-owned industries (telecommunications, banking and air transport, for starters), easing restrictions on foreign investment (foreign direct investment was a proudly pathetic $133 million in 1991), and curtailing government deficits (then running more than 10% of GDP).

Singh and the administration of the late Prime Minister P.V.N. Rao completed none of these tasks, and the four governments since then have not completed them either. But even partial reform proved powerful: Annual growth in GDP improved from 1.1% in 1991 to about 5% now; inflation fell from 17% then to 6% now; foreign direct investment is up to $4 billion a year; the gold was brought home and foreign exchange reserves have risen from $1 billion to $130 billion. Each government carried the work forward enough to make progress, and now that Singh is prime minister himself, and about to propose his first budget, the nation and the world are watching India with enthusiasm.

Urge to Imitate

There is no reason, other than the legacy of Gandhi and Nehru, that India cannot be the next China, with growth rates of 8% a year powered by foreign and expatriate investment for years to come. Indeed, Indians at many levels of society have become jealous of the Chinese success. They have been asking what their government could do to emulate the Chinese experience.

The answer ought to be what the Indian government should not do; it should stop doing to other industries what it accidentally failed to do with information technology. The computer age entered India through universities and start-up companies, not through government sponsorship or subsidy. Software development became a major industry almost before the government knew what it was.

Information technology has also become India's most globalized industry, to the point where it has become a major worry for some Americans. India hosts most major American computer software and hardware companies, which have found that Indian engineers and software writers are as competent as Americans, likely to be harder-working, and certain to cost a tenth as much in salary and benefits.

The expansion of infotech was made possible by an even more basic industry, telecommunications. Instant transoceanic communication lets Indians staff customer service offices and help desks for American clients, and links international teams of programmers and designers. In telecommunications, the Indian government adopted deliberate inaction: It stopped protecting its telecom monopoly, permitting private companies, including foreign companies, to offer communications of all sorts, from cable television to mobile phones to international satellite and transoceanic cable links.

Indian companies such as Infosys and Wipro have become famous and their founders famously rich providing services to American companies, and the biggest American companies run their own operations in India. In the industrial parks that ring the city of Bangalore are found large installations of companies such as GE, Perot Systems, Dell and Intel.

Coming Tests

The new government of Manmohan Singh is a coalition government and depends on parliamentary votes from one of the Communist parties for its continuance in office. Thus no Singh policy can be taken for granted. In the next few months, he and the coalition will be tested, as they try to set many new priorities.

Among them, tax reform: The national government hopes to replace many local taxes with a national Value Added Tax, which might be easier to enforce and harder to evade than a random assortment of municipal taxes that are ringed with restrictions. Unfortunately, as in any democracy, the different rates and various subsidies reflect the balance of political power. Finance Minister P. Chidambaram may find it hard to rationalize the political equilibrium.

The government also wants to attract $150 billion of foreign investment -- more than three decades' worth at the present rate. It's beginning to open some more of its monopolies, for example allowing foreign companies to operate some major seaports and negotiating with other foreign interests about oil and gas development.

Many say that India is becoming the world's low-cost service provider just as China is becoming the world's low-cost manufacturer. At present, however, the chief feature of India's economy is that it is still one of the world's high-cost agricultural producers. The Green Revolution, which brought abundant production of food, also averted the need for drastic change in rural areas. Nearly 60% of Indians are farmers, although they produce only 22% of GDP. They enjoy tax-free status and subsidized prices for their crops. India ought to accelerate consolidation of farms, embrace corporate farming and help the rural poor move to cities. There they will have opportunity to be more productive through better education and health care.

A heavy impulse to do good by arranging the economy still remains at all levels of the government. If India can resist the siren song of that legacy, the country may yet wipe away the tears of its poor.