India Pursues Free-Market Reform

ECONOMIC OVERHAUL

AS if Manmohan Singh doesn't have enough worries of his own, India's finance minister also frets about the Soviet Union.Throughout India's 44 years since independence from Britain, Moscow has been New Delhi's major political ally, trading partner, weapons conduit, and supplier of industry and infrastructure. Now, with India plunging into an economic overhaul and the Soviet Union tottering at the edge of disintegration, that old relationship is crumbling. The special rupee-ruble trade, under which India exchanged low-quality goods for Soviet loans, oil, and military help without draining scarce foreign exchange, is in trouble. With both countries dealing with foreign currency shortages, Soviet turmoil is disrupting the flow of military and industrial spare parts, special metals, and other goods. On top of this, India, in the midst of a massive bailout by international lending agencies, is stuck with financing through credits a rupee trade surplus it can't reduce. "We do worry because the Soviet Union is an important trading partner," Mr. Singh said in Bangkok recently at the annual meeting of the World Bank and International Monetary Fund (IMF). "Now Indian exports don't face a problem, but if the Soviet economy goes downhill, that has implications for trading partners of the Soviet Union." After more than four decades behind a wall of socialist planning, protectionism, and self-sufficiency, the Indian economy is opening up to the international free market. Where once India stood steeled and aloof against economic colonialism, the country's officials have now plunged into the capitalist thicket, lining up enormous loans, wooing foreign investors, cutting ponderous government controls, devaluing the rupee, and promoting trade. Prime Minister P. V. Narasimha Rao, the political veteran who took charge of a tenuous minority government last summer, had no choice but reform, political observers say. Mr. Rao came to power in a tumultuous election overshadowed by the assassination of former Prime Minister Rajiv Gandhi. With India battered by high oil prices following Iraq's invasion of Kuwait, Rao confronted a soaring budget deficit, an unserviceable foreign debt, and nearly empty foreign-exchange coffers. Still, in October India was enthusiastically applauded by international bankers for shedding its socialist orthodoxy and espousing economic reform.

$2.2 billion IMF loan The IMF is expected to approve a $2.2 billion, 20-month loan to India soon. World Bank officials also are sympathetic to India's request for $3 billion to $4 billion annually in aid over the next three or four years. Foreign commercial credits, suspended because of the growing external deficit, also are expected to resume soon. India wants to attract more foreign equity capital than the $1.7 billion it got in the 1980s. IMF managing director Michel Camdessus cited India as the leading example of "countries that have the courage not to resort to rescheduling or other measures to ease their situation. They have slogged on through to retain their creditworthiness." However, Singh, the Indian finance minister, admitted in an interview that the country of more than 800 million people, one of the world's poorest, will not turn the economic corner quickly. He did predict that India will at least escape its liquidity crisis within five years. "My view of India is not as a country which needs to be permanently on crutches," says the Western-trained economist and career bureaucrat. "But quite honestly, we have a long haul, and I can't say we will resolve it all in three to five years." The pace of reform and the government's steadfastness to fiscal restraint and monetary discipline will be determined by India's tumultuous politics, observers say. So far, Rao has astutely held off left-wing and right-wing opponents to push through reforms. The prime minister also won more breathing room when Rajiv Gandhi's Italian-born widow, Sonia, refused to run for her late husband's parliamentary seat. By urging Mrs. Gandhi to run, Gandhi family loyalists hoped to create a rival power-center to Rao.

Reforms affect some groups Still, the rupee's devaluation has pushed inflation dangerously high, pinching the increasingly powerful middle class. Policy changes have challenged traditional interest groups including the elephantine bureaucracy, left-leaning labor unions, and monopolistically minded businessmen. The government also confronts several touchy issues. Locked in a charged standoff with Pakistan over the disputed Kashmir border, India is sensitive to calls to reduce military spending, which soared until this year. Another key test is reducing fertilizer subsidies through higher prices, creating an inevitable confrontation with the notoriously inefficient but powerful fertilizer industry and increasingly militant farmers. After widespread protests over a proposed fertilizer price hike last summer, the government trimmed its increase from 40 to 30 percent. A recent report by the World Bank said Indian agriculture is in crisis and called for the government to stop supporting farmers. The bank charged that the wealthiest 40 percent of Indians benefit from subsidized food shops, while the bottom 40 percent are undernourished. Defensively arguing that the West is also grappling with agricultural supports, Singh says the government is committed to phasing out subsidies eventually. "There are risks and opportunities," Singh says. "We need to build social safety nets.... For those social programs, we are committed to finding money."