Manmohan Singh's economic ambitions could be strangled by the leftists in his governing coalition
By Jason Overdorf
(This article appeared in Newsweek International in November 2004).
In a pitch at the New York Stock Exchange in September, Indian Prime Minister Manmohan Singh asked U.S. investors for $150 billion in foreign direct investment. His country desperately needs the money for infrastructure improvements over the next 10 years. While India's recent economic growth has been strong, Singh argued, his country has barely scratched the surface of its potential. An economist credited with helping to launch India on the path of economic reform in 1991, Singh claimed that annual GDP growth over the next five years could average 8 percent a year—up from a 6 percent average over the last decade—if the country stuck with its reform agenda. Added the prime minister: "No power on earth can stop an idea whose time has come."
Except maybe his own ruling coalition. Bound by his Congress party's weak showing in the most recent elections (a mere 145 seats in Parliament out of 542) to an alliance with the communists and other leftist parties, Singh's reform ambitions are fragile, to say the least. Shortly after his NYSE appearance, communist M.P.s attacked Singh over the presence of so-called foreign experts in consultancies working with the national Planning Commission, the government agency that determines India's long-term strategic priorities. (All of the supposed foreigners were Indian nationals, but the leftists argued that their ties to foreign companies and organizations—including McKinsey & Co. and the World Bank—made their intentions suspect.) In the end, Singh disbanded the consultancies altogether, sending the pro-business "foreigners" and more leftist compatriots packing.
The tiff is a microcosm of the challenges facing Singh as he tries to accelerate economic growth while mollifying millions of voters, many of whom felt left behind by the liberalization policies of the former Bharatiya Janata Party government. On the one hand he has new allies among India's business elite, who are now influencing not just local but national politics and policies; on the other, he is hemmed in by his coalition partners, whose rhetoric and actions are themselves often at odds. It's not quite the capitalists vs. the communists, but the tug of war is real—and potentially the greatest drag on India's growth.
The economic-policy skirmishes have already started. Singh's reform plan has three key components: selling stakes in upwards of 35 state companies, raising the caps on foreign investment in key industries like telecommunications and insurance, and loosening the country's inflexible labor laws. Already, Singh's cabinet has approved an increase in the limit on foreign investment in India's aviation sector from 40 to 49 percent. But the left has so far blocked a proposed 25 percent increase in the FDI cap on the telecommunications and insurance sectors. In late October, Finance Minister P. Chidambaram told a meeting of business leaders that political pressures from coalition leftists would not stop the government's march to a market-oriented economy. He announced that a "reconstruction board" to advise the government on the sales of loss-making public companies would be set up soon, adding: "Some [state] companies will be closed down or sold."
The privatization issue is extremely sensitive. "Let privatization go to hell," Communist Party of India chief A. B. Bardhan said after last May's national election. On Oct. 27, the day before they were to meet with the prime minister, Bardhan and the Communist Party of India Marxist General-Secretary Harkishen Singh Surjeet told reporters that they were aware of government efforts to sell stakes in state companies such as Power Grid Corp. and Power Finance, both profitable last year. The Communists oppose the move, calling it "privatization through the back door."
The political left particularly opposes selling off parts of India's navratnas, or nine jewels, which are major state-owned industrial and energy companies. Markets have been hoping for years that the government would sell stakes in Bharat Petroleum Corp. and Hindustan Petroleum Corp. Last year the Cabinet Committee on Disinvestment decided to do just that—but the decision was overturned by the India Supreme Court, which said that such equity sales must be approved by Parliament. Later, the Communist Party forced the government to disband the Disinvestment Ministry, although Chidambaram's recent comments suggest it will be reincarnated soon. The Finance minister has denied that he wants to sell all nine jewels, saying "a line must be drawn" between those that are candidates for government "disinvestment" and those that aren't. He hasn't stated which criteria will be used.
Leftists claim their opposition to raising the caps on foreign investment is similarly nuanced. They maintain that selling foreign companies majority stakes in telecommunications firms, for instance, could have negative implications for national security. On the privatization issue, Prabhat Patnaik, a left-wing economist, contends that it's wrong for the government to sell state companies to private investors who must borrow from banks to finance the purchase, when the companies themselves could do the same to help boost their competitiveness. "It's absolute nonsense from my point of view," says Patnaik.
The intensity of leftist resistance is in some ways a testament to the clout India Inc. now holds in New Delhi after several years of healthy growth. At the local level, executives—many educated or formerly employed in the United States—have promoted capitalism aggressively in such cities as Mumbai, Hyderabad and Bangalore, home to the country's booming information-technology industry. They've also begun to make their presence felt in the halls of government. Business leaders, for instance, have managed to cut through red tape at the Ministry of Telecommunications to set up a new high-speed satellite uplink that can be shared by a number of software houses. IT tycoons have played a key advisory role in Bangalore, in particular, applying modern business-management techniques to the local government, boosting its transparency and modernizing its record-keeping.
Nationally, a growing, U.S.-style respect for corporate titans—fed by glowing profiles in magazines like Business Today and TV shows like CNBC's "India Business Hour"—has made stars of top executives like Reliance Group's Mukesh Ambani and Infosys India's Nandan Nilekani, and the bureaucrats are taking notice. "Twenty years ago, business and government would talk at cross-purposes," says Jerry Rao, CEO of the outsourcing company Mphasis and president of India's National Association of Software and Service Cos. "But over the last 10 years we've established a dialogue with each other, and in the last five years have included civic bodies in the conversation."
Several corporate high fliers, for instance, sat on the government's Kelkar Commission on tax reform. It recently recommended the elimination of some income-tax exemptions for individuals, a reduction of corporate taxes and the elimination of a corporate-tax loophole related to how firms define depreciation. The commission also advised the government to ax its many service taxes in favor of a single value-added tax that would drastically reduce the tax on retail goods.
None of the recommendations have yet been implemented, but they are under discussion within cabinet agencies. In the past, such policy changes would be bogged down in bureaucratic infighting for years. There is still some of that, to be sure, but with the corporate sector showing how to cut through red tape and get things done, ordinary Indians are now demanding more accountability from their government representatives. "Today, every government department is very conscious that political survival depends on economic progress," says M. K. Sanghi, president of the Associated Chambers of Commerce and Industry of India.
The executives aim to press their case by pointing to specific success stories. "Whether it's at the state level or the central level, there's a general receptivity to ideas from business," says Infosys CEO Nilekani. "It's not necessarily that all the ideas get implemented. But the receptivity is pretty decent across the board, with all governments." Analysts note, for example, the great increase in services available from the insurance industry since 2000, when the sector, long dominated by two state firms, was opened to private competition. The industry now has more than a dozen firms.
Business leaders also point to the transformation of West Bengal state, which was long notorious as a hotbed of trade unionism and economic nationalism. West Bengal's chief minister these days is a communist, but he's adopted a strong pro-business stance to attract industry and investment. The minister, Buddhadeb Bhattacharjee, likes to boast that Japan's biggest foreign investment is in technology firms based in his state. Indeed, he's so bullish that he's taken advantage of an unusual law to ban strikes in the thriving IT sector.
Most of Bhattacharjee's leftist brethren will still require convincing, however. Y. K. Modi, president of the Federation of Indian Chambers of Commerce, a group made up of mostly family-run firms, says that "many [leftist] political leaders are still living in the 1960s and 1970s, and don't realize that if we're to provide employment for all, growth needs to be stepped up to 10 percent." Saumitra Chauduri, economic adviser at the credit-rating agency ICRA Ltd., says that the left still tends to equate foreign investment with "imperialism," adding: "That is an illogical view."
The question is whether Singh, a political novice, can convince his partners that the voice of India Inc. should be more closely heeded. As Chaudhuri says: "[Singh] made it clear at the New York Stock Exchange that he has to have a relationship with the left, because this government has to last for four or five years. He'll use consultations and try to convince them [to back his plan]." Though Chaudhuri and others foresee difficulties ahead, Singh is not the only developing-country leader walking a political high wire. The president of Brazil, Luiz Inacio da Silva, has faced similar pressures—and so far he's kept Brazil headed in what the smart money believes is the right direction. There's no reason that the pragmatic Singh cannot do the same. India's economic future depends on it.
© 2004 Newsweek, Inc.