Bottom Line: Rao, RIP


WASHINGTON, Dec. 24 (UPI) -- Former Indian Prime Minister P.V. Narasimha Rao, a towering political figure in his country's economic surge over the last generation, passed away on Dec. 23 at the age of 83. Rao's passing marks the end of a gracious and savvy leader for India -- but by no means the end of an era.

With respect, Rao was not, as many have suggested, the "father" of India's boom. That, in my humble opinion, was another prime minister, the late Rajiv Gandhi.


But Rao was an important figure in Gandhi's dramatic 1984 decision to cut tax rates, a decision that led Indian stocks to leap more than 20 percent in one session, closing the market for the day. And he followed up accomplishments as foreign minister and finance minister as prime minister himself from 1991 to 1996 with further economic-growth policies. He took Gandhi's smallish privatizations and turned them into a long-term broad-based conversion of state assets. He stabilized the currency and reduced tax rates further.


Equally important, Rao, like Gandhi, was a member of the center-left Congress Party. Often, especially early in a country's history, the changes within parties are as important as changes in the balance of power between them.

Rao did not originate, but did help cement, the shift in thinking among India's democratic socialists towards a pragmatic mode of thought that incentives work, and private invention and risk-taking is the prime mover of economic growth. As a result, India's gradual shift towards growth policies has now, for more than 20 years, been essentially uninterrupted, through both Congress and opposition governments.

Rao was also part of an interesting Indian tradition that seems to be carried on today in the person of Sonia Gandhi, who this year took the Congress party back to power, but was willing to avoid a political controversy by not insisting on serving as prime minister herself. (See "Gandhi's un-power grab," Bottom Line, May 21, 2004.) That is, while he certainly did not shy away from political power, he didn't seem to grasp for it.

He was plucked from semi-retirement in 1991 to take over as prime minister after Rajiv Gandhi's assassination. He was smart and tough, but a soft-power consensus-builder. This is especially important for emerging democracies, where the temptation, from Putin to Peron, is to win an election -- and then build a political machine that helps insure it's the last one held for a long time.


Indian politics, from Mahatma Gandhi onward, seems willing to abstain from personality cultism. Rao was a link in that tradition, and it has served India well.

As this suggests, India's future should be a bright one, because it doesn't depend on any particular giant figure who will make brilliant moves forward, then stupid ones backward.

In an interesting new book, "IQ and the Wealth of Nations," authors Richard Lynn and Tatu Vanhanen describe what should be an obvious point, but one that is often overlooked by investors and national leaders alike. Human capital, in their view, is the ultimate source of new wealth and increased prosperity. It's what turns sand into silicon chips, black sludge into electricity. This being the case, India's clever and English-speaking population is well-positioned.

Demographically, India has Russia's brainpower but with the rule of law added on top, and China's raw population and potential for increased output, but with democracy and (relative) corporate transparency to boot. India also lacks the severe demographic bubble China will face in coming decades due to the latter's rapidly aging population.

The near term should be mildly positive as well. Current Prime Minister Manmohan Singh, who gave an intelligent overview of India's foreign policy in a speech on Dec. 21, gives every sign of conducting a detente with Pakistan over military issues, and an economic one with China and Southeast Asia on trade.


In recent months, he's backed off tactically on domestic economic issues such as privatization of electricity, something to keep an eye on as Singh attempts to manage a parliamentary coalition with communist and other far-left parties. This necessary backing and filling, however, does not appear to be any kind of a reversal of Singh's plans to keep privatization moving forward, but at a restrained pace, as U.S. Treasury Under Secretary John Taylor noted in remarks earlier this month.

India's stock index has doubled over the past two years to more than 6400, perhaps time to digest some gains. But it only recently surged through its old 2000 highs, and us up a modest 30 percent from a 1995 peak enjoyed under Rao. There's a lot more room up.

The bottom line: Stay in, but leave a little powder dry to buy more in the event there's a January-February budget surprise, such as further tax relief, as often happens in India, and is repordely on the government's drawing board.


Gregory Fossedal manages international investment strategy for Emerging Markets Group. His clients may (and usually do) hold long and short positions in many of the investment securities and opportunities mentioned in his reports. "The bottom line" is compiled from sources we believe to be reliable, but no representation is made that they are necessarily accurate or complete. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of UPI or EMG. Furthermore, they are subject to change without notice.


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