WASHINGTON, May 17 (UPI) -- India's rejection of prime minister Atal Bihari Vajpayee reminds one in its ingratitude of Britain's rejection of Winston Churchill in 1945. Like Margaret Thatcher's ouster in 1990, it imposes a heavy brake on the pace of economic reform. Yet unlike the departure of Arthur, Duke of Wellington in 1830, it does not represent the irreversible death of an ideal of government.
The coalition led by Vajpayee's Bharatiya Janata Party (BJP) won an overall parliamentary majority in 1999, at which time he and the BJP were known primarily for their Hindu nationalism and their construction of India's first nuclear weapon. Since that date, he has presided over a government committed to economic reform, that has raised India's economic growth rate to the historically unprecedented level of 8 percent per annum, while, aided by a good monsoon in 2003, reducing rural poverty significantly from its mid 1990s level. Yet in 2004, with record growth and a tentative peace deal with Pakistan on his resume, he was decisively rejected by the electorate. Not only has the cause of sound economic policy been damaged in the short term, its long term future in India has also been placed in doubt, as the electoral fruits of even the most successful reforms have proved to be so bitter.
At first sight, the new Congress Party-led government might seem adequately committed to continuing reform. Its likely finance minister, Manmohan Singh, was the brave soul who, faced with a near-default situation and a currency crisis, embarked in 1991 on the process of economic reform. Even Congress' partners, the Communists, are not really communists in the Western sense of the word, and are themselves committed at least to maintaining the reforms and privatization that have already taken place.
However, Manmohan Singh's reforms took place in one of the very few periods in which Congress was not run by one of the Gandhi family -- it was during the 1991-96 premiership of Narasimha Rao, shortly after the assassination of Rajiv Gandhi. If Manmohan Singh himself were to be prime minister, one could be optimistic, but it appears that Sonia Gandhi, the Italian-born wife of the late Rajiv, will take the top job. Given that her late husband, her mother in law Indira Gandhi and her grandfather in law Jawarharlal Nehru were architects of the disastrous socialist policies that led India to its 1991 nadir, Sonia Gandhi's commitment to economic reform must be at best doubtful -- it's a little like expecting the late Svetlana Stalin, daughter of the Soviet tyrant, to lead a reform effort in 1990s Russia.
While her friends in the Western media like to claim that Sonia Gandhi in 1964 went to "Cambridge University" to learn English, she was in fact a student at one of the short courses at the English language schools, unaffiliated with the university, that proliferate in that town -- a very different educational background indeed. Like the left-school-at-16 British prime minister John Major, she would seem educationally underqualified for the top job.
Sonia Gandhi's brave words about raising India's growth rate from the mere 8 percent achieved by Vajpayee to 10 percent, while increasing the resources devoted to rural infrastructure, are unachievable in the long run, given India's parlous fiscal position, the one Indian problem which Vajpayee barely dented.
Additional public spending on rural infrastructure is likely, given Gandhi's promises to the electorate, and her surprising support from a destitute rural proletariat who allegedly had seen little of the benefit of growth, but whose poverty level, according to the Wall Street Journal, sharply declined in the late 1990s and must have continued to decline further in the prosperity since 2000 and the good monsoon of 2003.
However, if Gandhi attempts to boost growth by additional injections of public spending (more than likely, given the family's fiscal history and belief system) India's fiscal position will quickly run out of control, and economic growth will be brought to a juddering halt by a necessary rise in interest rates (or, if they are artificially held down, by a foreign exchange crisis.)
This is the principal uncertainty over the incoming Congress-led government, presumably, given its fairly comfortable electoral position, to be with us until 2009 or so. For the first couple of years, the reforms that have already taken place, and the sheer momentum of India's economic takeoff, will ensure continuing solid growth, rising exports, and rising living standards for the Indian people.
After that, if Manmohan Singh or someone like-minded is finance minister, and public spending is kept under control, growing more slowly than the economy as a whole, there will be little problem. Growth may slow, as further doses of reform are not taken and the remaining inefficiencies begin to bite, but India's overall situation will remain on track, to await the judgment of the electorate next time around.
More dangerous, however, is the more likely scenario, that the pressures on Congress from its left wing allies, resisted only feebly by Sonia Gandhi, in any case likely to be a fairly weak leader, prove too strong for Manmohan Singh, if he is finance minister, and result in a renewed surge in public spending, made apparently more palatable economically by the increase in revenues brought by growth and the improvement in India's credit standing.
In that case, the first strain, maybe in late 2005 or early 2006, will probably be seen in India's financial markets, where domestic savers, asked to fund an increased public sector deficit at low interest rates, will rebel. The government will then be faced with a number of unattractive alternatives: to cut back spending (politically unattractive) to raise interest rates (possibly choking off economic growth in the short term) to borrow from abroad (likely to be difficult, for the amounts needed, without incurring unacceptable domination by the International Monetary Fund) or to re-impose tighter exchange controls.
Given Congress' history, the last will be tempting; it would also be disastrous, reversing the process of reform, re-closing the economy and plunging India back at best into the poverty of a 2 to 3 percent "Hindu rate of growth."
More interesting in the long run is what happens after 2009. By that time, whether or not the Congress government has avoided a fiscal crisis, India will be long overdue for a further burst of reform, in particular privatization of state industries and the final relaxation of controls over Indian investment abroad and foreign investment in India. Without such further reforms, even if the state budget remains under control, economic growth must inevitably slow as the takeoff into growth is once again aborted by the remaining restrictions, the inefficiencies of the state sector, and by India's endemic corruption.
Vajpayee himself, who will turn 85 in 2009, will presumably not be available. India's progress thus depends on whether the economic reformers, such as outgoing Minister for Disinvestment Arun Shourie, or the backward-looking Hindu nationalists come to dominate the BJP. Here the outlook is grim; the BJP party apparatchiks have just been taught that in 1999 Hindu nationalism led to electoral victory, while in 2004 economic reform has led to electoral disaster.
Vajpayee's last great service to his country may be to continue as BJP leader until 2007 or so, when the next election is in sight, and to control the succession so that an adequately reformist leader is chosen. Shourie in particular, who carried out six large privatizations in the first quarter of 2004, including the $2.2 billion sale of 10 percent of the Oil and Natural Gas Corporation, has shown the decisiveness and speed necessary for success.
If a reformist led BJP coalition wins in 2009, it will know that it must move quickly, since it may have only one term in office before a fickle electorate sweeps it away again. Identifying core growth sectors, such as information technology, is not the answer; as the defeat in Andhra Pradesh of "cyber-leader" Chandrababu Naidu demonstrated, a governmental focus on a single industry, reminiscent of Soviet leader Vladimir Lenin's obsession with electric power, produces unbalanced economic development and can severely alienate those left out.
Instead, India's chief need in 2009 as today will be economic freedom. A new government must move quickly and radically towards removing all forms of state economic control, abolishing the "permit raj" that has led India to be ranked among the most corrupt countries in the world. In itself, this will allow a severe reduction in public spending at both the federal and state levels, as controllers are let go, thus greatly alleviating India's chronic budget problem. Of course, in the first few years after the abolition of controls, criminals and cowboys will profit, as they did in Margaret Thatcher's Britain of the 1980s, but if controls are removed early enough in the government's term of office, the benefits of freedom will become apparent well before the next election is due.
To the electorate, the costs and unpleasantnesses of decontrol may by the following election time still be sufficiently persuasive to end the government's mandate, but that's politics. While the government may fall, the removal of controls will be likely to last; by that time there will be a sufficiently strong lobby benefiting from freedom to prevent the widespread re-adoption of controls.
This economic policy, bold, rash, and probably politically suicidal, appears to be the only way forward for reformers in a democracy such as India. Indians suffering in the next few years under a renewal of slow growth and possibly a re-imposition of even more of the permit raj, may look longingly at China, where essentially the same government has remained in power since 1979, imprisoning dissidents but generating growth rates that Sonia Gandhi may dream about but is very unlikely to produce.
Rather than China's one party state, destructive of civil liberties (and in any case likely soon to enter a banking crisis, though after 25 years of high growth this may seem a reasonable price to pay,) Indians may prefer to examine the third in the above collection of unexpected British exits, the Duke of Wellington.
Wellington's government was the last in a succession of Tory governments that from 1783 to 1830 produced and managed the first great economic takeoff, the Industrial Revolution. While a society with full civil liberties, Tory Britain was not a one man one vote democracy. Instead, members of parliament were elected on a constituency basis by a wild variety of different franchises, that had grown up over 500 years, with some constituencies such as Westminster being close to full democracy, while others, the "rotten boroughs" such as Old Sarum, were dominated by the local landlord. Thus the various interest groups and social status levels in British society were all represented, but on a basis that prevented the dominance of numbers alone.
Before dismissing this as a historical curiosity, or, as Whig historians did, as an antique tyranny to be swept aside by modernization, ask yourself one question:
-- Do you really believe that, if Britain had full one man one vote democracy in 1780, so that the rural poor and the handloom workers, by their numbers, had dominated the political system, the Industrial Revolution would ever have got off the ground?
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
Martin Hutchinson is the author of "Great Conservatives" (Academica Press, June 2004) -- details can be found on the Web site greatconservatives.com.