A United Front : India’s New Ruling Party Eager for More Foreign Capital

“The Indian elephant has awakened and begun to dance,” Anil Ambani, one of his country’s leading industrialists, told a conference earlier this year in the United States.

This week, the music changed.

A wobbly 13-party coalition--composed of free marketeers, Communists, regional parties and low-caste Hindus--is now in charge after five years that saw India sever a 4-decade-old tradition of quasi-socialism and begin adopting market-driven reforms.

On Wednesday, the government of Prime Minister H.D. Deve Gowda announced its economic and business policy: “growth with social justice.”

There will be continuation of economic liberalization and the wooing of more foreign investment, India’s new leaders said, but also strengthening of state-owned industries and new limits on what non-Indians can invest in.

“Honestly, I’m surprised and stunned by what they were able to do,” one Indian business leader said approvingly. “We were expecting much worse.”

“The government is going to take steps for speedy implementation of these policies,” Gowda vowed at a news conference where his government’s 25-page agenda was unveiled.

The ruling United Front’s “common minimum program” seeks an even greater role for foreign investment in kick-starting India’s economy, and pins the country’s needs at “at least $10 billion” a year.

Though $2 billion in foreign investment was approved last year in principle, only about $3 billion in foreign money overall has actually made its way into the economy since the former Congress (I) Party government began opening it up in June 1991.

The United Front’s eagerness for more capital will be encouraging news for foreigners, including Americans, who have been the leading investors in India since the reform process began. This hugely diverse country of 920 million people, the world’s most populous after China, has been identified as one of the top 10 emerging markets by the Clinton administration.

However, in a significant departure from the policy of its predecessor, the United Front coalition said it has decided to use tax and credit policies to keep multinationals out of “low-priority areas,” to be defined later.

Gowda’s own Janata Dal party and some of the other leftist parties in the center-left alliance oppose letting in foreign companies that deal in consumer goods, fearing they will drive weaker domestic competitors out of business and increase joblessness.

Despite the change, foreign firms already in India and manufacturing consumer products--from Kellogg’s Corn Flakes to Stroh’s beer--will be able to keep functioning, coalition officials said.

The 4-day-old government’s intentions, though, are just one of the new factors that investors and businesses eyeing India have to cope with. For despite its name, the United Front’s unity is doubted by many, along with its shelf life.

“A coalition government has never worked at the center previously,” said Suban Mukerjee, an executive with Calcutta-based ITC, an Indian conglomerate. “The parties, their voices, their platforms and their agendas are all different.”

The front, which must prove its majority in Parliament by June 12, must also depend on the votes of the former ruling Congress party to turn its plans into law. That can cut both ways: Congress won’t want to see the market-driven agenda it launched scrapped, but it could sabotage the 63-year-old Gowda if that seems politically expedient.

“There may be too many people pulling in too many different directions,” said Suresh Rajpal, president of Hewlett-Packard India and current chairman of the New Delhi-based American Business Council.

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The front’s program, though, leaves no doubt that the coalition members, regardless of politics, want much more foreign capital and know-how for India. And they are counting on economic growth, and not a socialist-style redistribution of wealth, to ease the grinding poverty that is the lot of hundreds of millions.

“It is growth which creates jobs and generates incomes,” the document stresses.

India’s new rulers, whose country is often likened to a lumbering elephant alongside the fleeter tigers of East and Southeast Asia, want the economy to grow by 7% a year, up from the current 6%, and for industrial output to rise 12% annually.

After numerous scandals that have marred India’s reputation as a place to do business, the United Front is also promising a “corruption-free and clean administration” and greater transparency in the bidding process for public contracts.

In one decision that will particularly please U.S. insurance companies, Gowda’s government said it has decided to end the state’s monopoly over the insurance sector, as had already been done in banking.

Because of its diverse makeup, though, the United Front must carefully balance the demands of India’s industrialists and foreign and home-grown investors against those of labor unions, subsistence farmers and the more leftist parties in the coalition.

As a result, instead of selling off competitive state-owned enterprises, the government has decided to assist them so they become “global giants.” To further protect the public sector, the front wants more professional management and workers’ participation.

In some areas, however, the “common minimum program” is fuzzy or lacks specifics. The accent is on protecting jobs and improving social services--including making public education compulsory for all children, a long-standing dream in a land where the literacy rate is only 48%. Yet the government’s fiscal deficit is supposed to be simultaneously cut back to under 4% of gross domestic product, from the current 5.5%.

“They have to politically sell the package,” said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

Though some uncertainty about India’s future course remains, to many the presence of Gowda at the helm is reassuring. Under his pragmatic chief ministership, Karnataka, India’s answer to Silicon Valley, grew to become the most investor-friendly state in India, raking in more than 10% of the foreign capital plowed into the country.

In January, when protesting farmers ransacked the Kentucky Fried Chicken restaurant in Bangalore, Karnataka’s capital, Gowda sent in the police, who arrested more than 100 demonstrators and enabled the eatery to get back in business, employees say.

“He very clearly told us that we would have no problems in the state,” said Sandeep Kohli, managing director of PepsiCo Restaurants International for the Indian subcontinent.

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Emerging Market

India, which is grappling with a new 13-party coalition government, promises to extend its free-market reforms to lure investment.

Per-Capita GDP Is Up...

Per Capita Gross Domestic Product

1996*: $430

...and Inflation Lingers ...

Annual rate of inflation

1996*: 11%

* Projections

... as U.S. Leads Investors

Foreign direct investment approved during January and February (in millions of dollars)

United States: $189

Sweden: $136

Mauritius: $106

NRI*: $84

Netherlands: $62

S. Korea: $33

Hong Kong: $28

France: $18

Singapore: $13

Germany: $11

* Non-resident Indians

Source: Bank of America World Information Services, Times of India

Researched by JENNIFER OLDHAM / Los Angeles Times

India’s Blueprint

The economic high points of the United Front’s 25-page “common minimum program,” released by Prime Minister H.D. Deve Gowda in New Delhi on Wednesday:

* Annual 7% growth in gross domestic product is targeted over the next decade to “abolish endemic poverty and unemployment.”

* Rapid, labor-intensive industrialization is needed to achieve 12% annual growth in the industrial sector. This will require massive capital, modern technology and continued deregulation.

* India “cannot do without foreign investment” and needs at least $10 billion annually, five times current levels.

* Foreign investment in “low-priority areas” will be discouraged through government taxation and credit policies.

* If necessary, Indian companies will be protected from foreign competitors to guarantee the former a “level playing field,” and competitive, state-owned industries will be assisted with the aim of making them “global giants.”

* Investment in infrastructure must be increased from the current 3.5% to 4% of GDP a year to at least 6%. In just the next five years, India needs $200 billion to improve its power-generating capacity, oil industry, telecommunications, railroads, roads and ports.

* As the “highest priority,” the fiscal deficit will be brought under 4% of GDP from the current 5.5%.

* Private ventures will be allowed into insurance, a sector reserved for public-sector companies.