India's Premier Launches Radical Economic Reforms

INDIAN Prime Minister P. V. Narasimha Rao is trying to reshape a bankrupt economy and stay in power at the same time.The political veteran became head of the predominant Congress (I) Party and of India after former Premier Rajiv Gandhi's assassination in May and the country's most turbulent election ever. Mr. Rao, long regarded as a scholarly but cautious Congress loyalist, inherited a ponderous, protected economy tottering on collapse. Since then, to win international loans and an emergency bailout, he has defied that reputation and thrust India into a radical economic overhaul. The rupee, overinflated and isolated for years, has been devalued and is to be fully convertible in a few years. Bureaucratic industrial planning, called license raj or rule, has been abandoned, except for a few industries. Trade has been deregulated to encourage exports. Foreign investment and multinational corporations, the bugbears of socialist planners for years, are now welcome, and foreign companies can control Indian businesses. In a new budget announced last week, defense spending - a major factor in the country's soaring deficit - has been trimmed. Subsidies, a cornerstone of the India's socialist orthodoxy preached by the first Prime Minister Jawaharlal Nehru, have been cut. "Let the world hear it loud and clear," said Finance Minister Manmohan Singh, an economist who predicts the country's economic transformation could take up to five years. "India is now wide awake." "License raj has met its Waterloo because there's no choice today," says S. L. Rao, director of the National Council of Applied Economic Research. "Indian industry can compete internationally. It doesn't need to be mollycoddled anymore." So far, the month-old minority government has room to maneuver because no politician wants to challenge the changes and risk another election, political observers say. Rao is India's fourth prime minister in two years, and the recent political instability and election tumult has wearied the public. Cash-strapped India has been under pressure internationally to make economic changes to avert default on its $71 billion foreign debt. The International Monetary Fund (IMF), which lent New Delhi almost $2 billion in January, just approved another $220 million loan and is considering a request for even more assistance later this year. Just how cautious politicians are was shown in the lack of reaction to the defense cuts. Despite tension with rival Pakistan over the Muslim uprising in Kashmir, the reduction was not criticized by the hawkish Hindu right-wing Bharatiya Janata Party. However, the sweeping changes are challenging powerful vested interests and thrusting this poor country of more than 800 million people into a difficult transition period. IN the past, the influential bureaucracy hijacked efforts to trim its powers and, during Rajiv Gandhi's five years as prime minister, sidetracked plans to modernize and liberalize the economy. Analysts say the military, which has long taken an apolitical stance uncommon among third-world countries, is skeptically watching for signs of further defense cutbacks. Although many businessmen and economists have been sympathetic, in the new budget the government risks angering businessmen by sharply hiking corporate taxes, reducing depreciation on plant and equipment, and initiating a tax on interest earned by banks and financial institutions. The upper middle class, which has emerged as a significant political force, faces higher duties on cars, air conditioners, video recorders, and other consumer goods they have come to take for granted in recent years. In addition, the reforms confront India's long-held belief in economic self-sufficiency and a deep suspicion of the western-dominated lending institutions. "The IMF path offers no solution to the present crisis," said a statement by left-wing parties who are influential among Indian labor unions and have called for widespread protests. The government has tried to soften the impact on Indian consumers, who are already grappling with double-digit inflation. Money for antipoverty programs has been increased and the cost of kerosene, the main fuel of the Indian poor, has been cut. Food prices, however, are inching higher. Making matters worse is this year's poor monsoon. A 40 percent increase in fertilizer costs is expected to raise prices for consumers and farmers, an increasingly vocal political lobby. "The government has a touchy job ahead of it," says a western diplomat.