India's Path to Economic Reform Reaches a Fork

The New York Times

Published: May 13, 2009

By VIKAS BAJAJ

In India, independence, land reform, a green revolution and bank nationalization are recognized as the governing Congress Party’s achievements over last 60 years.

The Bharatiya Janata Party is the main opposition party to the current Congress Party that is promising to provide the struggling diamond industry with subsidies and to protect the farmland from excessive reforms, “dubious industrial projects”.

Amid the global economic downturn, India’s traditional socialist-style self-sufficiency is becoming more and more captivating to many people in the West. However, Indians are still indifferent about the openness and dynamism as they consider their outdated policies, that insulated India from the rest of the world, as a factor that enabled the country’s fast and tremendous economic growth of the past 15 years.

Regardless of which party comes to power in voting that ended on Wednesday, the next stage of Indian reforms will be controversial.

A decade of high growth and increasing prosperity has created beliefs among many people in the political class that it is not necessary to seek for openness to investment, fewer state-owned companies, or greater deregulation of the private sector. Regarding banks, whose 70 percent of shares are held by the government, Sonia Gandhi, the Congress Party’s president, said that the nationalization of banks has “given our economy the stability and resilience we are now witnessing in the face of the economic slowdown.” As well, he insisted to retain a majority stake in state-owned companies. Congress Party is proud of their achievements of saving India from freewheeling capitalism. Prakash Karat, a Community Party leader, said that the left-wing’s economic policies of regulating the country’s involvement in global economy has “protected our economy, national sovereignty and the interests of the people.”

On the other hand, economists and political analysts who believe the necessity of deeper reforms in India warn that the left-wing parties seem to have forgotten the time when the country struggled with slow growth and sever poverty due to the country’s policy of isolating itself from the outside world during the cold war. Raghuram G. Rajan proposed financial reforms that many people “don’t quite remember how bad it was in the ‘80s when we had tremendous amount of rationing, when it took years to get a car, when it took years to get a phone.”

Since the subprime mortgage crisis in the United States, the antipathy toward capitalist has only grown. Small parties who reflect populist demands seem to be ready to forgo liberalization and openness to foreign investors. Razeen Sally, director of the European Center for International Political Economy said, “this crisis provides cover for the Indian politicians to say we were right to be cautious.”

Meanwhile, Rajeev Chandrasekhar, an independent member of the upper house of Parliament and an entrepreneur, said he was worried that the country would end up facing a new crisis if it doesn’t undertake the next series of reforms as soon as possible.

Opinion: I believe this kind of controversy between openness and closeness is what a economically developing country is destined to face. South Korea also faced the same controversy in the 1970s to 1980s when the country's economy boosted and people were discussing whether they should accept external influences or not. Korea's president Park Chung Hee imposed a policy of opening its gates to the world and learned new technologies and economic systems to further improve the nation's economy. The result of this was both advantageous and disadvantageous. Influx of foreign technologies enabled the country's industrail development and led to creation of jobs. As well, exporting goods earned a huge amount of money. On the other hand, foreign capitalists dominated Korea's economy, taking away Korean businesses' room to rise on the horizon. Considering both advantages and disadvantages, I believe it is necessary for Indian government to make a wise decision that can balance between opennes and closeness to both develop and protect its developing economy. As well, as Prakash Kara warned, it is critical to make social reforms such as establishment of reliable economic system and building infrastructure, changing labour laws, and streamlining licensing requirements. Such a social reform would benefit the nation's economy in the long run because establishment of ineffective economic system can directly lead to recession just like South Korea fell into IMF crisis after years of economic growth. With the huge population and cheap labour, India has a incredible potential to become a world power in terms of economy. For it to achieve the status in the world relations, it should answer the question of openness and closeness wisely and establish effective economic system that they can rely on in their long run.