Governing India

Sustaining economic growth while tackling poverty is the challenge for India's new government.

| Tue May 18, 2004 3:00 AM EDT

Last week, India's ruling Bharatiya Janata Party (BJP) was booted out of power by the nation's innumerable poor, who have seen little to back up its campaign slogan, "India Shining." The Italian-born Sonia Gandhi—leader of the Indian National Congress Party and widow of the assassinated prime minister Rajiv Gandhi—led the party to victory but today, in a surprise, says she won't take the prime ministership.

Congress won 150 seats—far short of the 272 needed to form a majority It unsuccessfully courted the communists who consider the government's leftist coalition far too pro-capitalist. Still, the communists have agreed to back Gandhi for prime minister. Foreign investors, on the other hand, are worried Congress will reverse some of the pro-market policies of the BJP.

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The Congress's surprise victory and announcement that it will pursue the policy of "selective" asset sales resulted in investor panic. The Bombay stock exchanged plunged by 17.5 percent on Monday with Indian companies losing some $40 billion.

Congress has tried to reassure investors that it is pro-market and pro-growth, but it will also have to balance those claims against the needs of an electorate that feels cheated by status quo. As the International Herald Tribune points out:

"The next finance minister's job will not be easy, because the Communists want to retain subsidies on food, fertilizer, electricity and most everything else. The Congress, on the other hand, is committed to "attain and sustain" economic growth of 8 percent to 10 percent, which will require reducing India's chronic budget deficit.
Moreover, the new finance minister will have to take on the Communists if he wants to give businesses more leverage in hiring and firing workers."

India is Asia's third largest economy, and one could see why the country, at least from investors' point of view, was "shining" under the BJP. As Forbes points out, "India's economy expanded by 8.1 percent in the fiscal year to March and is expected to grow another seven percent in 2004/05."

Unfortunately, the service-driven economy has not translated into job growth and improvements of miserable living conditions for the more than one billion Indians who live on less than $2 a day. The computer programmers who are the best-known face of the country's growing middle class—as well as being the poster-boys for Americans' fears of white-collar job outsourcing—represent a tiny sliver of prosperity in a sea of poverty. As the Guardian argues:

"No one knows the extent of India's middle class, but most accept that two-thirds of the country's 1 billion people live in rural areas where electricity, running water and usable roads are luxuries not necessities. The digital divide is such that the country, as investment bank Goldman Sachs observed, is home to 'nearly a third of the world's software engineers and a quarter of the world's undernourished.'
While this situation presents a paradox, it is not an enigma. India's development is one born of policies that have been skewed in favor of the rich and the aspirational since the country's independence. About four-fifths of healthcare spending in India is effectively private medicine. Spending on universities rather than schools sees the country produce 2 million graduates a year and leaves more than half the country's women illiterate."

It would be unfair to pin all of the blame for India's troubles on the BJP. After all, it was the Congress party that ruled India for most of its years as an independent state. The tech boom highlighted longstanding income and regional disparities; it didn't create them. The growing middle class concentrated in India's majors cities is a testament to the quality of the country's university education and embrace of foreign investment—a policy instituted in the 1990s by Congress's finance minister Manmohan Singh, who is slated to step into the post once again. The free-market policies pursued by the BJP, then, were initiated by Congress, which is in no sense a hard-left party.

The BJP's mistake was to bet electoral victory on a sunny campaign targeting the middle class in a country where the enfranchised poor form a majority. Counting on the effectiveness of nationalist rhetoric—including vicious personal attacks on Gandhi's foreign origins—and voters' pride in the country's recently acquired nuclear arsenal were also important miscalculations.

Massive improvements in the countryside's infrastructure will be crucial to insuring that India's impressive economic growth continues and alleviating poverty. As Ravi Bhatia of the Economist Intelligence Unit points out:

"The BJP did relatively little for rural agriculture…There may be attempts at, for instance, improving irrigation, which would do a lot to stimulate the agricultural economy."

Amidst uncertainties about the course that the new government will take on economic policy, a large measure of continuity is expected on the foreign policy front. Congress signaled that it will continue negotiations with Pakistan over the disputed Kashmir region begun by the outgoing prime minister Bihari Vajpayee. As Congress's Mani Shankar Aiyar says:

"The recent elections are a historic turning point. But with regard to our relationship with Pakistan, they are not a turning point in that the continuity of the peace process will be maintained."

India, with all its economic woes, territorial disputes, and authoritarian neighbors, is the world's most populous democracy. The new government now faces the huge challenge of managing and sustaining India's economic growth while remedying its social inequalities and securing a peace with Pakistan.

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