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| ROBERT NICKELSBERG FOR TIME |
| HARD SELL: New malls don't impress most voters |
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Posted Monday, May 17, 2004; 21:00 HKT
India's economy is one of the world's most exuberant. Powered by low interest rates, a thriving tech sector and strong consumer spending, it grew by a spectacular 10.4% in the last quarter of 2003. But the victory of the Congress Party and its allies quickly vaporized the mood of wild optimism. On Friday, India's stock market tumbled 6% as investors grappled with the election news. "The economic ramifications are poor," says Saumitra Chaudhuri, an economist at ratings agency ICRA.
The stock market's slide shows the extent to which India's boom has been credited to the Bharatiya Janata Party's (BJP) policies of tax cuts, encouraging foreign investment and privatizing state-owned companies. Businessmen who have grown used to being pampered by the BJP's reform-oriented Finance Minister Jaswant Singh and by pro-business Chief Ministers such as N. Chandrababu Naidu now face the ominous prospect of a government that allies the left-leaning Congress with a group of communist parties. Confirming investors' fears, the communists quickly announced their opposition to a continued sell-off of state-owned companies that are profitable, thus triggering widespread dumping of shares in public-sector firms.
Some top business leaders in the country launched a damage-control blitz to assure the world that India's success story isn't over. After all, they argued, Congress initiated the process of dismantling India's socialist economy in 1991, and remains no less committed to reform than the BJP. "If you look at the manifestos of the two parties, you will find they are quite similar," says Hemendra Kothari, chairman of investment bank DSP Merrill Lynch. Even the communists appeared eager to calm the capitalists' nerves. Insists Jyoti Basu, a senior communist leader: "Reforms will go on."
The question is at what pace. Because Congress swept to power on a wave of discontentment among unemployed and rural voters, its priorities will differ from the BJP's. Whereas the BJP's focus often seemed to be urban—promoting technology and attracting foreign investment—Congress is expected to repay its supporters by trying to stimulate agriculture and create jobs for the poor. Such efforts are clearly overdue. Even Nandan Nilekani, CEO of Infosys, one of India's top tech firms, admits: "We need to look beyond IT. It might create a couple of million jobs, but it's not enough to meet the aspirations of the people across this country."
Kenneth Courtis, vice chairman of Goldman Sachs Asia, argues that the new government's "social focus" might even help the broader economy. Bringing development to the countryside, he says, "gives the economy a better base for growth." But to revive the countryside, India will need to undertake massive infrastructure projects to enhance irrigation, transportation, storage and power—and that will require money the government can ill afford, given the country's huge fiscal deficit. One way to bankroll these job-creating investments is to slash subsidies to farmers, cap salaries for government employees, and reform unprofitable state-run utilities. But political pressures might make such measures unfeasible. "The new government might see higher taxation as a route to fiscal balance, especially if the left has influence on economic policy," warns Subir Gokarn, chief economist of ratings agency Crisil.
Foreign investors are nervous, too. One result of the new government's focus on employment may be a slowdown in the rate at which India's economy opens up to overseas investment: for instance, Congress is unlikely to lift the ownership restrictions that keep most Western supermarket chains out of India, for fear of sparking unemployment among the country's shopkeepers. Yet for all its talk about addressing unemployment, Congress may well avoid the tough reforms needed to create jobs in the manufacturing sector. India's rigid labor laws are a key reason why many employers hesitate to hire new workers, but labor reform—which is opposed by many trade unions in the country—is not on Congress's agenda.
Despite such concerns, many economists believe India's economy is strong enough to keep growing by at least 6% a year, no matter who is in power. That's not as heady as the 8% growth rate some bulls had forecasted, but it's hardly cause for despair. And their optimism may soon be reignited if the new government shows that it is pro-reform by, say, reappointing Manmohan Singh as Finance Minister, 13 years after he initiated India's reform process. Goldman Sachs' Courtis predicts that economic reform will slow but not stop: "I don't think there's any reason for alarm bells. You have yellow lights up ahead, not red lights." Still, he adds: "I wouldn't be throwing a new wad of money at the Indian stock market for a while."
With reporting by Michael Schuman/Hong Kong
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