An elephant, not a tiger A special report on December 13th 2008

INDIA2.indd 1 4/12/08 13:59:24 The Economist December 13th 2008 A special report on India 1

An elephant, not a tiger Also in this section The democracy tax is rising Indian politics is becoming ever more labyrinthine. Page 3

Storm•clouds gathering W hat the world recession will do to India’s economy. Page 5

The world is rocky But computer•services †rms are in good shape to survive the †nancial crisis. Page 6

Creaking, groaning I nfrastructure is India’s biggest handicap. Page 8

Where invisible threads fray A litany of trouble spots. Page 10 For all its chaos, bureaucracy and occasional violence, India has had a India elsewhere remarkably successful past few years. James Astill asks how it will cope An awkward neighbour in a troublesome with an economic downturn neighbourhood. Page 12 ARLY next year, perhaps in April, India’s mains a small part of their troubles. To deal Ecoalition government will face the with those, Sonia Gandhi, Congress’s Ruled by Lakshmi judgment of 700m voters. Being mostly leader, will reissue a lot of unkept prom• T hough inequalities are widening, India’s poor, they will not be happy. Recent ises when the election campaign begins: to best prescription remains continued rapid months, moreover, have brought particu• bring everyone electricity, piped water, growth. Page 13 lar hardships: high in‡ation, a patchy mon• schools and jobs. She will say little about soon, a slowing economy and vanishing what this government has actually done: jobs. In a worrying time, the terrorist at• there hasn’t been much. tacks in on November 26th•29th At the same time Mrs Gandhi and her came as a particularly harsh blow. They prime minister, Mr Singh, have presided gave the world images of India that jarred over the biggest investment•led boom in with the shining message of its recent pro• India’s history. In the past †ve years the gress. For three days India’s most cosmo• economy has grown at an average annual Acknowledgments politan city and aspirant international †• rate of 8.8% (see chart 1, next page). Ser• I n addition to those named in the text, the author would nancial centre echoed with gun†re. Amid vices, which contribute more than half of like to thank all those who generously assisted in the the slaughter wrought by just ten well•or• GDP, have grown fastest, above all India’s preparation of this special report. Particular thanks are due to: Omar Abdullah, Montek Singh Ahluwalia, Chetan ganised assassins many individual Indi• computer•services companies. Infosys, Ahya, Suman Bery, Surjit Bhalla, Pramod Bhasin, Creon ans acted heroically. Yet the institutional TCS and Wipro are now world•famous Butler, Saumitra Chaudhuri, Nitin Desai, Wajahat response, as so often, was poor. Properly names. But Indian manufacturing has also Habibullah, J.J. Irani, Tony Jesudasan, Manoj Joshi, Rajiv Kumar, Som Mittal, Sudip Mozumder, John McCarthy, trained troops took over nine hours to ar• done well. Its impressive run culminated Vineet Nayar, T.N. Ninan, Sanjaya Panth, Sachin Pilot, rive at the scene. Most of the 170•plus vic• in January with the launch by Tata Motors Aditi Phadnis, Vishnu Prakash, Chandra Bhan Prasad, tims died during that time. of an ultra•cheap family car, the Nano. Jairam Ramesh, Sunali Rohra, Suhel Seth, Arun Shourie, Kapil Sibal, Manvendra Singh, N.K. Singh, Sanjay Ubale, The Congress party, which leads India’s Wilima Wadhwa, Yogendra Yadav ruling coalition and runs Maharashtra, the A world of fewer opportunities state of which Mumbai is the capital, is India is now facing harder times. Its stock• A list of sources is at likely to su er for this. To make amends, market has been sliding all year. As global www.economist.com/specialreports Congress sacked the interior minister, and credit has dried up, even Tata Motors, one Maharashtra’s chief minister. The govern• of India’s best companies, has been strug• An audio interview with the author is at ment, led by (pictured gling to lay its hand on capital. India’s www.economist.com/audiovideo above), has also raised a cry‹though not, economy is slowing rapidly and con†• thankfully, its †sts‹against , dence is fragile. Previously soaring foreign A country brie†ng on India is at whence the terrorists probably came. investment in the country is expected to www.economist.com/india Yet for most poor Indians terrorism re• dip. Nobody yet knows how serious the 1 2 A special report on India The Economist December 13th 2008

number in China. Growing ambition 1 To make a serious dent in poverty, India Young and vigorous 2 India’s GDP, % increase on previous year needs to keep up economic growth of India’s population by age group, 2008, m around 8% a year. In the medium term that MALES FEMALES 12 should not be too diˆcult. More impres• 10 sive even than the success of India’s best 150 100 50 0 50 100 150 companies is the zest for business shown 80+ 8 by millions of Indians in dusty bazaars 70-79 6 and slum•shack factories. They are truly entrepreneurs. It is no coincidence, as is of• 60-69 4 ten noted, that Indians have prospered 50-59 2 everywhere outside India. 40-49 But India’s task remains daunting. 0 Some 65% of Indians live on agriculture, 30-39 1980 85 90 95 2000 05 08* which accounts for less than 18% of GDP. 20-29 Sources: CEIC; Government statistics *Forecast Shifting them to more productive liveli• 10-19 hoods‹and so reducing poverty‹would 0-9 2 slowdown will be, but in theory a reces• be hard even if the number of people of Source: US Census Bureau sion in the rich world should hurt India working age was not growing so fast. less than other emerging markets: exports Roughly 14m Indians are now being added amount to only about 22% of India’s GDP, to the labour market each year, and that surgency in eastern India, which Mr Singh against 37% of China’s. number is rising. Half of India’s people are has called Œthe greatest internal security Diplomatically, India has also started to under 25 and 40% under 18 (see chart 2). challenge we have ever faced, is an obvi• matter more. The US•India nuclear co•op• They cannot all work for Infosys. Indeed, ous ill omen. Where it is spreading, in poor, eration agreement, which was approved because of India’s historic underinvest• agrarian and broken places, the Œinvisible by America’s Congress in October, was the ment in education, many are not obvious• threads that bind India, in the phrase of clearest sign of this: to let India in from the ly skilled at anything. By one estimate, Nehru, its †rst prime minister, are almost nuclear cold, the developed world has which may be optimistic, only 20% of job• non•existent. made an exception to the counter•prolifer• seekers have had any sort of vocational In recent years India has been creating ation regime. Mr Singh can take much cred• training. If India cannot †nd employment more jobs than the gloomier scenarios sug• it for this. A courteous and scholarly for• for this lot, poverty will not be reduced gested. Between 2000 and 2005 its rate of mer †nance minister who launched and India may face serious instability. employment growth doubled, to 2.6% a reforms in 1991 that unshackled India’s Its democracy will be no defence. India year. But that is still insuˆcient, and there mixed economy, he has been an e ective is already worryingly violent. A Maoist in• are also fears about the quality of jobs be• envoy for India. ing created. To escape throttling labour At home, often stymied by his co• laws, Indian entrepreneurs tend to keep alition’s leftist allies, he has done much their operations small: 87% of manufactur• less well. But, among his few successes, he ing jobs are with companies that employ can claim that India, the world’s fourth• fewer than ten people. These tend to be biggest emitter of greenhouse gases, has both less productive than jobs in bigger started to get serious about climate change. companies and less protected by the law. It refuses to consider cutting its carbon If India is to sustain a growth rate of 8% emissions, arguing that they are still very or higher, as it aims to do, it will need to low per Indian. But guided by Mr Singh, In• manage four potential constraints. The dia’s bureaucracy has at least accepted most pressing, its rotten infrastructure and that, being hot, poor and agrarian, India the dreadful quality of its education, are, will be badly hit by climate change. alas, not new. But the government’s re• That makes India’s main priority, re• sponse has long been inadequate, and ducing poverty through rapid economic with India’s burst of high growth these growth, even more urgent. According to two problems have become more urgent the , in 2005 some 456m Indi• than ever. India’s current rulers, the ma• ans, or 42% of the population, lived below houts to an elephantine state, seem at least the poverty line. In 1981, by the same mea• to understand this. But their e orts to end sure, the numbers were 420m and 60% re• these troubles remain unconvincing. In• spectively. The government’s own esti• dia’s other big constraints, its cumbersome mates are lower. But everyone agrees that labour and land laws, should be easier to poverty in India is falling much too slowly. †x. But there is depressingly little sign that Pick another wretched statistic: there this will happen soon. are plenty of them. India has 60m chroni• India is getting stronger, but its pro• cally malnourished children, 40% of the blems are also growing. In the end, the pat• world’s total. In 2006 some 2.1m children tern of its progress suggests, it will succeed. died in India, more than †ve times the But it may be a long and painful grind. 7 The Economist December 13th 2008 A special report on India 3

The democracy tax is rising

Indian politics is becoming ever more labyrinthine

O GET the measure of India’s political der and rape. Most Indian politicians are pass almost any of the reforms India will Tclass, picture this. On July 21st Manmo• presumed to be corrupt, which is less sur• need to keep up that performance. The han Singh convened an historic gathering prising. In India’s poor and fractious soci• Communists were the most obvious at the Sansad Bhavan, India’s rotund par• ety patronage politics is inevitable. But In• blockage; they opposed every liberal pro• liament building. The government had dian politics has got much muckier in posal on principle. But more broadly, like been abandoned by its Communist allies, recent years because of two factors: the India’s vast bureaucracy, the government putting Mr Singh’s great achievement, a rise of regional and caste•based parties, na• has expended far too much energy merely civil nuclear co•operation deal with Amer• kedly dedicated to delivering patronage; to sustain itself. ica, in jeopardy. The government had been and the mutinous coalitions this has led to. The nuclear deal epitomised its weak• reduced to a minority. If it folded, the deal In 2004, after eight years in the wilder• ness. As a bilateral agreement, signed by would die with it, so Mr Singh asked parlia• ness, Congress returned to power after Mr Singh and President George Bush in ment for its support. winning 145 seats in parliament. The BJP, 2005, it did not need parliamentary ap• Over two days a few brave politicians which had run a fairly competent coalition proval. But because of opposition from the debated the nuclear deal. The rest of the government under , Communists the government was unable house jabbered and yowled, in many ton• won 138. To form a government‹for which to seek the necessary approvals for the gues, for the television cameras. A convict• 272 seats are required‹Congress put to• deal from the International Atomic Energy ed murderer stretched out on a backbench; Agency and the Nuclear Suppliers’ Group, he and four other jailbird members (all a club of 45 nations. All last year this stand• pro•government) had been freed for the In the balance 3 o dominated the government’s business. vote. Shortly before it took place, three India’s parliament, current seats by party The deal was said to be o , then on, then members of the main opposition Bhara• o again. , a senior Con• Vacant Others tiya Janata Party (BJP) produced bricks of 22 142 gress leader who is close to the Commu• Allies Allies rupee notes: part of a bribe, they said, giv• 72 35 nists, mediated between them and Mrs en by government supporters for their United National Gandhi. This left regrettably little time for votes. By hook or by crook the government Progressive Democratic his other job, as India’s foreign minister. won, by 275 votes to 256. Alliance Alliance In September 2007 Congress’s regional In a coup•ridden region, Indians are jus• partners urged Mrs Gandhi to forget the ti†ably proud of their democracy. It has nuclear pact rather than risk an early elec• been interrupted only once: in 1975, by In• tion. She agreed. The deal was resurrected Indian Bharatiya dira Gandhi’s 21•month state of emergen• National Janata in June only after Mr Singh allegedly cy. At their next opportunity India’s voters Congress Party threatened to quit. The Communists 151 122 threw out Mrs Gandhi and her Congress walked out. But the government survived Source: Lok Sabha Secretariat party, for the †rst time in its history. There• by recruiting a new ally, the low•caste Sa• by they issued a message about the impor• majwadi Party (SP) from Uttar Pradesh. tance of timely elections that India’s lead• gether the United Progressive Alliance The hope had been that the govern• ers have never forgotten‹and if they did (UPA) with 12 other parties. Ruling in this ment, relieved of its Communist allies, forget, India’s Election Commission would arrangement would have been hard might push through a few †nancial•sector issue a reminder. It is strong and indepen• enough, but the UPA was still short of a reforms. In the event, reduced to a minor• dent: it can‹and does‹remove any oˆcial majority. So Congress recruited Œoutside  ity, now squabbling with the SP and with it suspects of undue bias. This ensures that, support from another †ve parties, the most an election season coming, it has felt too every †ve years, over a period of a few important of which was a coalition of weak even to try. weeks, India holds a reasonably orderly Communist parties, the ŒLeft Front. This is troubling. It indicates the risks In• and fair election. Its 29 states do the same, dia’s governments will increasingly have according to their own electoral calendars. Suspended animation to take to get support for any bold policy. For a vast and somewhat unruly nation, This absurdly complicated and unrepre• Reaching a consensus is becoming impos• where the state is often partial and corrupt, sentative government has turned out to be sible, so fragmented is the polity. In the these are tremendous accomplishments. more enduring than many expected. For 2004 election Congress and the BJP mus• If only the election commissioners Congress’s leaders, indeed, its survival is a tered only 283 seats between them, a re• could decide which Indians are †t for elec• formidable achievement: the party had cord low and only 11 more than is needed tion. The country’s politicians are mostly never managed a coalition before. With for a majority. Both parties saw their share an unsavoury lot. Of the 522 members of competent managers in the main eco• of the vote decline. Congress’s shrank India’s current parliament, 120 are facing nomic ministries, the government can also more, to 26.7%, almost a record low. Yet it in• criminal charges; around 40 of these are take some credit for India’s strong eco• creased its share of seats, partly because accused of serious crimes, including mur• nomic performance. But it has failed to the BJP’s vote was spoiled by smaller par•1 4 A special report on India The Economist December 13th 2008

2 ties. Congress nonetheless got the oppor• schemes to boast about, including a pro• tunity to form a government, for a reason gramme of public works that it claims will beyond either party’s control: the BJP’s al• provide work for 30m households this lies fared unexpectedly badly. year. But the recent turn of events in India, All that can con†dently be said about including last month’s terrorist attack in India’s next government is that it will be a Mumbai, will make such things hard to coalition, probably led by Congress or the boast of. And because Congress’s state•lev• BJP. If neither party can make the neces• el machinery is weak, it is not good at ad• sary alliances to get a majority, there is a vertising even these small successes. slim third possibility: a government led by This re‡ects the party’s highly central• a regional, caste•based or conceivably ised leadership structure, based on the cult even Communist party, with Œoutside of the Gandhi family of which Sonia is the support from one of the two national par• current representative. The Italian•born ties. Such an arrangement could make the widow of , a fourth•genera• current government look positively united tion leader of Congress and of India who and progressive. was murdered in 1991, Sonia was persuad• Mayawati thinks big Elections this month in three important ed to take over the party in 1998. She, like northern states, and six states in all, should this government, has done a bit better than perhaps 15% of Indian voters‹typically o er clues as to which scenario is the most expected. But even if Mrs Gandhi was bet• high•caste and from the north‹who liked likely. As this special report went to press, ter than she is, she could not restore Con• its Hindu•chauvinist creed, known as Hin• results were pending from Rajasthan, Ma• gress to anything like its former power. dutva, or ŒHinduness. In power, from 1998 dhya Pradesh and Chhattisgarh, which are to 2004, the party tried to expand its base all currently held by the BJP. A sweep for The Gandhi factor into a broad temple of right•of•centre na• either of India’s main parties would be a For almost four decades it ruled India by tionalists. To avoid o ending its allies, big boost, though not conclusive, as the BJP relying on three main groups for support: many of whom had Muslim followings, it found in 2004. It called that general elec• Muslims, high•caste Hindus and Hindu da• also placed less stress on Hindutva. But tion six months early, on the back of poll lits (formerly Œuntouchables). The frag• after its 2004 defeat the party fell to feud• victories in those same northern states, mentation of Indian politics is partly a con• ing. Its modernisers were demoralised. Its and lost. Results are also due from elec• sequence of these groups turning to other Hinduist ideologues, a more powerful tions being held this month in Delhi, parties. Congress’s performance in general group, attributed the election defeat to in• which Congress has ruled for a decade; in elections does not fully re‡ect this: it actu• suˆcient Hindutva. In 2005 they forced the Mizoram, a small north•eastern state; and ally does better at the centre than in the party’s prime ministerial candidate, in troubled Jammu and Kashmir. states, where patronage politics is more in• L.K.Advani, to resign as its leader. The general election will be an impor• tense. That may be because of a residual The BJP’s fortunes have since im• tant test of Congress’s ability to reverse its fondness for the Gandhi family. But it will proved. In the past two years the party or long decline. Since 2004 it has scored some not restore the party’s lost base. its allies have won six out of 11 state polls. modest hits. Besides survival, its govern• Congress knows this. But having no Congress has won in only three minor ment has a number of lavish welfare strong ideology to unite its squabbling fac• states. A victory for the BJP in May in Kar• tions, the party’s leaders remain forlornly nataka‹its †rst in a southern state‹was es• faithful to the Gandhi dynasty. This was pecially impressive. Mr Advani, an octoge• painfully obvious last year when the party narian bruiser, has also been reinstated as charged Mrs Gandhi’s 38•year•old son and the party’s prime ministerial candidate heir apparent, Rahul, with restoring the and unoˆcial leader. He has restored party’s fortunes in UP, India’s biggest state. some of the BJP’s old sense of purpose. It is the ancestral seat of the Gandhis and But this momentum may not take it also the birthplace of India’s most power• very far. Badly as it did in 2004, the BJP per• ful low•caste parties. Under Mr Gandhi’s formed well in a few populous northern well•meaning but unimpressive leader• states, including the three currently await• ship, Congress got 22 out 402 seat in UP. A ing election results. If it loses ground there, party for dalits, the Bahujan Samaj Party as the anti•incumbency tick suggests it (BSP), won a big majority. might, it is not obvious where it can make it In diˆcult times it would be reasonable up. In the past, when times were hard, the to suppose that Congress is in for a hiding BJP responded by lambasting Muslims. But in the coming election. Even in good times to do that, even after the outrage in Mum• Indian voters tend to be disappointed with bai, would be a mistake‹not least because their governments. Indeed, that was an• the BJP urgently needs to recruit new allies. other reason why the BJP lost in 2004. The A BJP•led government would o er In• terrorist attacks in Mumbai should also im• dia a better prospect of reform than the prove the chances of the security•obsessed current arrangement, but possibly not BJP. But it is not clear to what extent the much better. Compared with Mr Vajpay• Hindu nationalists can capitalise on this. ee’s government, the BJP would probably Advani advances During the 1990s the BJP built a base of be a smaller component of the coalition. 1 The Economist December 13th 2008 A special report on India 5

2 And Mr Advani is not the deft coalition The BSP succeeded, through skilful negoti• members of a still downtrodden group. manager that Mr Vajpayee was. Whether ations, by recruiting leaders of other But it might be disastrous for India. Maya• Congress could make a better †st of bring• castes, including brahmins. Thus it aped wati has a reputation for egomania and ing change, given another chance, would Congress’s own historic strategy. If Maya• gross corruption (though this has never depend †rst on whether it was again wati can replicate this success in the gen• been stood up in court). Newspaper re• shackled by the Communists. eral election, she could play a big part in ports, working from her tax return, have Of the other possible coalition leaders, deciding the composition of the govern• estimated her personal income at $12m, one, the BSP, which is led by an autocratic ment. UP alone commands 80 seats in par• twice the †gure for her party. Her support former primary•school teacher called liament. And Mayawati is trying hard to in• for an unsuccessful scheme to append a Mayawati, has captured India’s imagina• crease her reach outside the state: in shopping mall to the Taj Mahal, which is in tion. The dalit party’s victory in UP was a February she drew 80,000 people to a rally UP, does not speak well of her judgment. stunning achievement. Until then, caste• in Delhi. She has declared her ambition to India’s democracy tax, like Ms Mayawati’s based parties had struggled to attract much be India’s †rst dalit prime minister. income tax, is rising. But so, at least to some support from outside their narrow base. That would be truly inspirational for extent, is its ability to pay. 7 Storm•clouds gathering

What the world recession will do to India’s economy

T IS an acknowledged truth that the nies have been turning to Indian banks for Iworld’s †nancial breakdown has proved money. They then sell rupees for dollars to Don’t stop now 5 the need for public ownership of banks, †nance their foreign operations. To sup• Savings and investment as % of GDP limits on borrowing abroad and strict pru• port the currency, the Reserve Bank of In• dential rules at home. Or so some Indian dia (RBI), the central bank, has been selling 40 policymakers now reckon; and they have a up to $2 billion a day from its foreign•ex• Investment 36 case. Because India has been constrained change reserves, which have dropped by in this manner, its economy has remained nearly $63 billion from a high of $316 bil• 32 relatively undamaged by the global †nan• lion at the end of May. All this, on the back cial meltdown. India’s banks are sound of two years of tightening monetary poli• 28 and its foreign debt is manageable. cy, has brought India its own credit crunch. 24 Meanwhile, in common with others, In response, since mid•September, the Savings India’s stockmarket has crashed, losing RBI has been trying to boost liquidity. An• 20 60% of its value this year. Foreign portfolio other bene†t of a tightly controlled †nan• investors, who last year put in $17.4 billion, cial sector is that the central bankers have 1990 92 94 96 98 2000 02 04 06 08* Sources: Ministry of Finance; CMIE *Forecast have turned tail. This has put pressure on many options. On several occasions they the rupee, which has lost some 20% of its have cut the minimum amounts that lend• value against the dollar since January, ers must deposit with the RBI. For the †rst rupee is a blessing for India’s exporters, es• when the market peaked. The global †nan• time in four years the RBI has also been pecially its important computer•services cial freeze has accelerated the currency’s cutting its main short•term lending rate, industry, whose main market is American fall. Part of the problem may be that, un• now at 6.5%. The rise in wholesale prices, banks. Even so, merchandise exports are able to raise capital abroad, Indian compa• which hit a 16•year high of 12.9% in August, struggling; in October they were 12.1% is still well above the RBI’s comfort zone, down on a year earlier. But at least India is though dropping fast. But with investors less reliant on trade than most emerging Losing momentum 4 struggling to †nd cash, the RBI is now wor• nations: exports amount to only about 22% India’s industrial production ried about growth. of India’s GDP. This is yet another historic % increase on previous year, three-month average Even before global con†dence dived, weakness that India can feel brie‡y re• 14 India’s economy was slowing. In August lieved about. More broadly, however, its industrial output was up by only 1.4% on a economic performance justi†es pride. 12 year earlier, nowhere near the 6% that had 10 been expected. The RBI has already re• Like a rocket 8 vised its forecast for GDP growth this year Consider the growth †gures. Between 1982 6 downwards, from 9% to 7.5%, and even that and 1992, on the back of some modest lib• 4 may be optimistic. Most independent fore• eral changes to its mixed economy, India casters see a further drop next year, possi• grew at an average annual rate of 5.2%. In 2 bly to 5.5%. That would be worrying, but 1991, prompted by a currency crisis, the 0 India might still be the world’s second•fast• government brought in swingeing re• 2002 03 04 05 06 07 08 est•growing big economy after China. forms. Led by Manmohan Singh, then the Source: CEIC Things could be worse. The weakening †nance minister, it cut taxes and tari s and 1 6 A special report on India The Economist December 13th 2008

2 largely dismantled a system of industrial Everyone agrees that India’s long•term and explicable by the same demographic controls (the Œlicence raj). Between 1992 potential growth rate has leapt, but the size change that China has undergone. India’s and 2002 the annual economic growth of the jump is hotly disputed. Optimists bulging working•age population gives it a rate was 6%. It would have been higher but point to India’s soaring investment rate. high ratio of earners to elderly depen• for a late dip, caused partly by the Asian During the 1990s this was around 25% of dents. A young population should be suˆ• currency crisis. GDP, but since 2003 it has averaged 35%. cient to keep India’s savings rate close to Since then India’s economy has taken Encouragingly, this has boosted invest• the current level for the next two decades. o with a whoosh. In the past †ve years it ment in manufacturing, of which India ur• This, the Œshining India story in a para• has recorded an average annual growth gently needs more to create jobs. In the graph, has also caused excitement abroad. rate of 8.8%. If it could keep this up, India past †ve years Indian manufacturing has Until this year India, like all emerging mar• would be transformed, as China has been. grown at an average annual rate of 9%, ris• kets, had seen a surge in foreign invest• Its $1 trillion economy would double in ing to 12% last year. ment, but most of it was speculative. In the size in eight•and•a•half years. Poverty past two years, however, foreign direct in• would be reduced at a speed previously Parsimonious habits vestment has been catching up. In the †rst unimaginable. This has generated huge ex• The crowning reason for optimism, how• quarter of this year inward direct invest• citement in India which the government ever, is the savings rate, which has risen in ment was worth $10 billion, more than has encouraged. The planning commis• similar measure. Until recently India’s in• twice the equivalent †gure for last year. sion’s latest †ve•year plan, which became vestment splurge has mostly been covered Yet there are some darker sides to this operational on April 1st, envisages an aver• by domestic savings: as a share of GDP, hopeful tale. The †rst is in‡ation. At its re• age annual growth rate of 9%, rising to 10% savings have risen from 28% in 2003•04 to cent rate of growth the economy was from 2012. 35.5% last year. This is a China•like level, prone to overheat. This became apparent 1

But India’s computer•services †rms are in good shape to The world is rocky survive the †nancial crisis

NFOSYS, one of India’s biggest and portant incentive for the engineering col• rates have fallen by a similar amount. Itrendiest outsourcing †rms, set nerves leges mushrooming in south India. Nandan Nilekani, a former boss of Info• jangling on November 14th when it said it Most Indian computer•services com• sys, which has $2 billion in the bank and would give its workers year•long sabbati• panies are at least in †ghting form. Smaller no debt, says a slowdown will be an op• cals to do charity work. Or gardening, †rms, which o er imaginative‹and per• portunity for some useful Œre•tooling. wise guys said. India’s computer•services haps dispensable‹niche services could Mr Nilekani is loth to draw a compari• companies, which derive around 85% of struggle in a slowdown. But the biggest son with the previous global downturn, their revenues from exports to America have little debt and lots of cash. As much in 2001, when growth in India’s comput• and Britain, and 30•40% from †nancial• as 80% of their revenues, moreover, come er•services slowed down a bit and then re• services work, will be hit hard by the †• from essential services‹Œkeeping the bounded vigorously. The current slump is nancial crisis. In October Infosys‹or Infy, lights on in industry•speak‹which their far more serious. But Indian IT †rms still to its friends‹cut its predicted revenue customers could not easily cut back. Be• see opportunities in it. Several, including growth for the year to 13•15%. In an indus• fore the †nancial meltdown the failure of Infosys, are looking around for cut•price try that has grown by nearly 30% a year for India’s computer•service companies to of• acquisitions. In October TCS agreed to the past decade, that would be bad. fer higher•value functions‹such as con• buy Citigroup’s Indian back•oˆce opera• Since Lehman Brothers went bust in sulting, which accounts for less than 10% tion for $505m. One of TCS’s bosses, N. September and †nancial markets froze, In• of their revenues‹was considered their Chandrasekharan, says recent mergers be• dia’s outsourcing †rms have struggled to main weakness. In current conditions it tween big Western banks may also send clinch deals. ŒIt’s been tough, says Girish may prove a strength. fresh business to India: the job of integrat• Paranjpe, boss of Wipro, another Indian ing huge IT systems is the sort of labour• IT•services giant that had big contracts The upside intensive work in which its †rms excel. with Lehman. Next year could be worse: Harder times have already eased another Another fear for India’s IT †rms is by one estimate, IT spending in America industry problem: ballooning wage bills, America’s new president. Barack Obama could fall. A big slowdown in India’s IT in• driven by a shortage of skills and the but• has promised tax breaks to American dustry, which employs 2m people, would ter‡y habits of Indian IT workers. Most †rms that resist the temptation to shift be a blow to the national economy. Com• big †rms are hiring fewer people this year: work abroad. India’s IT †rms already en• puter services, with annual revenues of Tata Consultancy Services (TCS) will re• joy a tax break that is due to run out in over $50 billion, account for about 16% of cruit 30,000, a huge number but down 2010 but may now be extended. Of course India’s exports. The indirect e ect could from 35,000 last year. Partly becaue of fall• it would be better if all these companies be far•reaching: India’s success in IT is a ing demand, the average rise in IT wages paid their dues and got on with business; national con†dence•booster and an im• has halved, to around 10% a year. Attrition but that is another story. The Economist December 13th 2008 A special report on India 7

2 el ar y last year: as credit soared and the cur• rent•account de†cit widened, in‡ation jumped to nearly 7%. That was why the RBI began tightening. The subsequent spike in commodity prices contributed even more to India’s in‡ationary surge. At the same time, nearing the end of its term, the government has been on a spending spree. Public expenditure has ris• en by over 20% in each of the past two years. This has returned India’s public †• nances to their traditional mess, after a temporary improvement thanks to bu• oyant tax revenues. Economists at Gold• man Sachs expect a budget de†cit of around 8.4% this year. If only the spree had been more pro• Ripe for reform ductive: a massive investment in India’s in• frastructure would have been overdue. In• investment rate (its current•account de†cit 1999. Hardly any of its prescriptions, he stead, the government’s largesse was recently widened to about 3.5% of GDP). notes, have been followed: ŒWe have to handed out in the usual wasteful ways‹on High public spending also contributes to start acting faster. oil and fertiliser subsidies and public•sec• in‡ation, which limits the RBI’s freedom to Reformists in the government appreci• tor pay increases‹and on some high•pro• cut interest rates. If the current high cost of ate this. On October 30th the cabinet ap• †le welfare schemes. borrowing deters private investment, the proved a draft bill on insurance reform. If government will have little scope to o er a passed, it will include raising the current Madcap subsidies public alternative. The investment rate 26% ceiling on foreign ownership of Indian India’s subsidy policies are crazy, as all its will then come down, and growth with it. †rms to 49%. This is one of seven †nancial• governments have realised. But none has Sadly, the prospects of either this gov• sector reforms (others cover banking and been able to change them much. For exam• ernment or its successor dismantling the pensions) that have been awaiting approv• ple, the government hands cash, in ever subsidy raj are dim. Perhaps the petrol sub• al for four years because the Communists bigger quantities, to manufacturers of ni• sidy, for which there is no obvious justi†ca• were obstructing them. The insurance bill trogen•based fertilisers. They produce lots tion, may be eased, though not this side of was supposed to come before parliament of low•cost, poor•quality fertiliser with the election. But the more ruinous kero• this month, but even if it does, there would which Indian farmers poison their †elds sene subsidy is likely to remain as long as not be time for it to be approved under the and themselves. The government’s spend• most poor Indians have no access to elec• present government. ing on fertiliser subsidies is expected to run tricity; no matter that, by an oˆcial esti• to $23 billion this year. The total subsidy mate, half the supply of subsidised kero• Reasons for hope bill is estimated at over 3% of GDP. sene is creamed o by corrupt middlemen. What reforms the next government might Making nitrogenous fertilisers uses a lot The government’s pro‡igacy makes it introduce will depend on the make•up of of natural gas, which increases India’s reli• all the more essential that it retains the con• its coalition. It will depend, too, on how se• ance on oil to meet its energy needs. India †dence of private investors. The best way rious the slowdown is. Sadly, there seems imports 75% of the oil it uses. Alas, it also would be to surprise them with some almost no prospect of another raft of liber• subsidises petroleum products, including long•awaited reform. Even bullish Indian al measures. Yet there are some slim rea• petrol, kerosene and diesel, by †xing the economists, con†dent in a high•growth fu• sons for hope. price at which they are sold to consumers. ture, say as much. According to Arvind Vir• One is duress. A †scally straitened gov• India taxes these products as well, so the mani, the prime minister’s chief economic ernment can either cut spending, which subsidy is smaller than it appears. But this adviser, the medium•term target of a 9% would be diˆcult, or boost revenues. In a still makes the budget †nances hostage to GDP growth rate Œwas clearly based on an slowing economy it might therefore con• the oil price, now mercifully falling. assumption that we will push ahead with sider selling a few of the state’s many loss• India’s †scal problems are nothing reformðGiven the global crisis, it’s impor• making companies. Another, more tenta• new: its de†cit has often been around 10%. tant that we accelerate reform if we want tive, reason for hope is political. In middle• As it happens, the most recent splurge is to meet the target. class India, especially, the recent run of well timed: the †rst tranche of a civil•ser• Asked what reforms are most pressing, high growth has become a source of na• vice pay rise was handed out in October, Mr Virmani tosses over a book in which he tional pride. So it is reasonable to hope, at just as worries about in‡ation gave way to describes them. They include, in order of least, that more politicians will make sus• fears about growth. What is new is India’s importance: †scal reform, including of taining rapid economic growth their high• realistic hope of sustaining economic subsidies; privatisation of public enter• est priority. growth of 8% a year. Ineˆcient govern• prises; opening state•controlled banks to The third reason is intellectual. India ment spending puts this at risk. more private ownership; reform of India’s has, so far, been proved right in opening its Because the government eats up so throttling labour laws; and liberalising cer• †nancial sector to globalisation only cau• much of India’s savings, the country relies tain industries, including coal and sugar. tiously. But in a more carefully regulated unduly on foreign capital to sustain its high Mr Virmani’s book was published in April world it should become less reluctant. 7 8 A special report on India The Economist December 13th 2008

Creaking, groaning

Infrastructure is India’s biggest handicap

O KNOW why 1,000 Indian children in Delhi has fallen from 27kph (17mph) in will require a total investment of $100 bil• Tdie of diarrhoeal sickness every day, 1997 to 10kph. All of the country’s roads are lion and is meant to be completed by 2013. take a wary stroll along the Ganges in Vara• perilous, even before a million Nanos a But this is still nowhere near enough. nasi. As it enters the city, Hinduism’s sa• year are added to them, as predicted by India’s urban population is expected to cred river contains 60,000 faecal coliform Tata, the car’s maker. Last year 130,000 peo• double over the next two decades, to 575m, bacteria per 100 millilitres, 120 times more ple died on India’s roads, 60% more than in yet its cities are already choking. Mumbai, than is considered safe for bathing. Four China, which has four times as many cars. South Asia’s biggest city, has 17m inhabit• miles downstream, with inputs from 24 An even bigger worry is India’s short• ants, half of whom live in slums. The city’s gushing sewers and 60,000 pilgrim•bath• age of power. Last year peak demand out• rail network is overloaded and its roads are ers, the concentration is 3,000 times over stripped supply by almost 15%. In Pune, an clogged up. the safety limit. In places, the Ganges be• industrial town in Maharashtra, business• comes black and septic. Corpses, of semi• es were cut o for 24 hours at a stretch. At Why nothing works cremated adults or enshrouded babies, such times computer•services †rms grum• There are two main reasons for the decrep• drift slowly by. ble and switch on their generators, but fac• itude. First, tight land and rent controls India’s sanitation is execrable. By one tories shut down. According to the World have destroyed Mumbai’s land and prop• estimate, only 13% of the sewage its 1.1 bil• Bank, 9% of potential industrial output in erty markets. For fear of being stuck with lion people produce is treated. An estimat• India is lost to power cuts. Some 600m In• immovable tenants, for example, land• ed 700m Indians have no access to a dians have no mains electricity at all. lords have left an estimated 40,000 prop• proper toilet. Water•borne diseases caused The government has given unprece• erties vacant. The second reason is long• by poor sanitation are a big reason why In• dented attention to India’s infrastructure standing underinvestment in Mumbai by dia’s children are so malnourished. This de†cit, with some decent results. Follow• the state government of Maharashtra. It might sound familiar. Almost a century ing in its predecessor’s footsteps‹despite has preferred to divert Mumbai’s revenues ago Mohandas Gandhi disparaged a book the Communists’ rowdy objections‹it has to rural Maharashtra, which has more vot• about India by Katherine Mayo, an Ameri• pushed public•private partnerships (PPP) ers. To protect this source of patronage, it can novelist, as a Œdrain•inspector’s re• for building roads and airports. Hyder• has also sabotaged Mumbai’s municipal port. India needs to follow a simple man• abad and Bangalore each opened a new government. India’s giant cities need pow• tra: ŒFewer inspectors, more drains. airport this year. By 2010 the main airports erful mayors to manage their develop• The general rottenness of India’s infra• in Mumbai and Delhi will have been mo• ment, as China’s cities have, but state gov• structure has long been recognised as the dernised. The government has also ernments are opposed to the idea. Maha• likeliest constraint on the country’s econ• launched a plan to build a 1,500km road rashtra’s has nonetheless embarked on a omy. In the past year or two the problem and rail network, linking Delhi to Mumbai, $60 billion makeover of Mumbai, includ• has become extremely urgent. India’s and studded with manufacturing hubs. It ing new roads, rails and a metro line. It is ports, roads, railways and airports have promising, though greatly delayed. been operating close to‹or beyond‹ca• India plans roughly to double its invest• pacity. It takes an average of 21days to clear ment in infrastructure, to $475 billion over import cargo in India; in Singapore it takes the next †ve years, or about 8% of GDP a three. The Port Trust in year. But this year’s investment is likely to Mumbai, which handles 60% of India’s be only around 4.6% of GDP, and it is not container traˆc, has berths for nine cargo clear where the extra cash will come from. vessels; Singapore’s main port can handle The government expects private inves• 40. With the number of air passengers in tors to contribute three•quarters of the ad• India growing at 30% a year in the past two ditional investment in infrastructure and years, the creaking of its four main airports 40% of the total. But they were wary even was almost audible. before their credit crunched. Many cite the India’s 3.3m km road network is the shallowness of India’s corporate•debt world’s second•biggest, but most of it is markets as an obstacle. Innumerable bu• pitiful. Its prize national highways‹a reaucratic and legal impediments are also vaunted infrastructure success of the pre• putting them o . A vaunted scheme to en• vious government‹account for only 2% of courage big privately owned power sta• the total, and only 12% of them, or tions, called Œultra•mega power projects, 8,000km, are dual carriageways. By the promised that these obstacles would be end of 2007 China had some 53,600km of cleared in one go, but in reality a dozen per• highways with four lanes or more. India’s missions at both central and state level are urban roads are choked: the average speed A matter of drains still required. With green†eld develop•1 The Economist December 13th 2008 A special report on India 9

needs. Alas, its abysmal record on supply• ing Indians with basic health care and edu• cation, to which they have long been enti• tled, suggests that this will not necessarily deliver the goods. Primary education is a particular wor• ry. It is hard to teach illiterate Indian wom• en basic hygiene. Illiterate men are not equipped for productive employment. Yet in 2001 only 65% of the population was lit• erate, optimistically de†ned, compared with 90% in China, even though every In• dian government for the past two decades has vowed to †x primary education. The current government is no exception. It has increased the overall education budget, Still †xing primary education but not much. Last year it represented 2.8% of GDP, about half the †gure in Kenya. 2 mt en s proliferating in India, this bureau• form in 2003 which sought to separate (or At least almost all Indian children now cratic process, riven with corruption, has Œunbundle) power generation, transmis• go to school: a survey of 16,000 villages earned the moniker Œthe permit raj. sion and distribution. But many of the carried out last year by ASER, an NGO, put Public•sector projects get equally states have ignored or undermined this the enrolment rate at 96%. But it also point• bogged down. The boss of the Delhi Metro law, so 35% of India’s power is still stolen. ed to the appalling quality of education on Rail Corporation, a hugely successful ven• Before an election in Punjab last year the o er. Half of ten•year•olds could not read ture, describes having to go personally to state government promised free power to to the basic standard expected of six•year• Delhi’s chief minister on several occasions farmers even though it was already cover• olds. Over 60% could not do simple divi• to get permission to fell a few trees. He was ing losses by the state utility that account• sion. One reason is that, according to a fortunate to have a helpful patron. Accord• ed for more than half its †scal de†cit. (It World Bank study, only half of Indian ing to Amitabh Mundhra of Simplex Infra• still lost the poll.) teachers show up to work. Half of Indian structures, a big infrastructure builder, hav• Where reform of the system has start• children leave school by the age of 14. ing to rely on the government to obtain ed, things have improved. In north Delhi, bureaucratic approvals is a strong reason where distribution has been privatised, Let the market provide for not going into partnership with it: ŒIn• the theft rate has dropped from 48% to 18%. Or rather, many of them turn to private dia is not often feasible for PPP. In September the central government tri• schools, on which poor Indians spend 2% pled a †nancial incentive available to the of their incomes. Many of these are wholly Powerless states for developing the power sector, unregulated, but apparently no worse for Attracting private investment is hardest which it hopes will stimulate healthy com• it. A study of a Hyderabad slum, by James where it is needed most, in power. In the petition among them. But it is equally pos• Tooley of Britain’s Newcastle University, next †ve years the government plans to in• sible that the worst•performing states will found that of 918 schools, 35% were govern• crease India’s generating capacity by an slip further behind. Five of them contrib• ment•run, 23% were private but oˆcially annual 14%, or 90,000MW. That should ute 80% of the total losses of India’s state approved, and 37% were informal. The not be too ambitious. China added utilities, and †ve better•governed ones private schools were better. In a standar• 100,000MW in 2007. But India will not contribute 78% of the cash pro†ts. dised test the informal private schools ac• meet its target; it never does. Last year it In 2005 the government recognised tually came out best, with an average mark added only about 7,000MW, and that was power as one of Indians’ Œbasic human of 59.5% in English, compared with 22.4% a considerable improvement on the recent in the government schools. past. Consultants at McKinsey argue that Clearly the government should sup• India’s power•generation targets are in fact Not good enough 6 port the grey market in education that its much too modest. They prescribe an extra Total public education spending, 2005 own failings have given rise to. It should 20,000•25,000MW a year, which would As % of GNP As % of GNP per person make it easier for private schools to get ap• involve a $600 billion investment over the proval. Their teaching materials could then next decade. 12 be upgraded and standardised. ASER’s sur• That would require a huge increase in 10 vey also suggests that, with a few sensible private investment. But private investors 8 steps, big improvements are possible even fear they would not get paid for their elec• in state•run schools. By making teachers tricity, because state governments, which 6 accountable to local governments, Bihar, control most of the sector, like to give it 4 India’s most unlettered state, roughly away to voters, especially farmers, or al• halved its truancy rate last year. A draft law 2 low it to be stolen. awaiting parliamentary approval would The state electricity boards are there• 0 make similar changes across India. fore bust. To deal with this problem, the India Sub-Saharan Africa Higher education is another candidate Source: UNESCO central government introduced a bold re• for reform. In the past †ve years the rate of 1 10 A special report on India The Economist December 13th 2008

2 enrolment in higher education has taken will be much better than most Indian pub• who would submit themselves to this pro• o , from 7% to 13% of young Indians. But lic universities, which are run by state gov• cess are the politicians who control it, and the quality of teaching at India’s 348 uni• ernments. In these places the teaching is indeed many of them own universities. versities and some 18,000 colleges is gener• mostly dreadful, syllabuses are outdated In a recent paper on India’s higher edu• ally poor. NASSCOM, the IT industry’s lob• and facilities can be a health hazard. cation, Pratap Bhanu Mehta and Devesh by group, reckons that of the 350,000 Many private establishments (which Kapur call it Œthe collateral damage of Indi• engineering graduates who emerge each must be aˆliated to a public university an politics. For corrupt state•level rulers, a year, mostly from private colleges, 25% are and cannot be run for pro†t) su er the tightly regulated university system has unemployable without extensive further same de†ciencies. With demand for high• many bene†ts. Politicians, or their lackeys, training, and half are just unemployable. er education outstripping supply, they collect bribes for appointing faculty, admit• In response to an urgent need, the cen• have little incentive to improve. Cumber• ting students and awarding good grades. tral government has announced plans for some and politicised regulators add to They insert their supporters to run the 30 new centrally run institutions. These their woes. Getting approval to open a racket. Having destroyed a public universi• will not be †rst•rate. In a recent ranking of nursing college in India can take years ty, they then grant themselves permission the world’s 500 best universities by Shang• even though there is a dire shortage of nur• to open a private one from which, illegally, hai Jiao Tong University, only two were ses, with only 30% of nursing jobs in rural they milk pro†ts. India’s politicians would from India. But the new central institutions hospitals †lled. Almost the only investors clearly be mad to reform this system. 7 Where invisible threads fray

A litany of trouble spots

S AN assault on the commercial heart rist group‹for so it is considered‹the Mu• arrests, expulsions, killings, murders, fake Aof India, the terrorist outrage in Mum• jahideen are a particular worry. They seem encounters, tortures, su erings, cases, bai on November 26th•29th was unprece• to be a subtly di erent sort of Islamist kill• trials and tribulations in‡icted on us will dented. Previous atrocities in the city, in• er from those in Mumbai. They have not be answered back, then here we re• cluding multiple bomb blasts on its emerged from a long campaign by Paki• mind you: that those days have gone. railway in 2006 that killed 180 people, stani and Bangladeshi militants to stir re• This was not the jihadism as displayed were indiscriminate. But the attacks last volt among India’s 150m Muslims. Poor by the nihilists in Mumbai. In their com• month (which, like many before, have and often marginalised, they have many plaints, if not their atrocious methods, the been blamed on Pakistan•based Islamist grievances. In a chilling letter claiming re• Indian Mujahideen may have more in militants) pinpointed the rich and in‡uen• sponsibility for the Delhi blasts, the Indian common with India’s horde of peasant tial. Well•known Indian businessmen and Mujahideen gave a list of allegedly state• revolutionaries, regional separatists and 22 foreigners, mostly Americans and Euro• sanctioned crimes against Muslims. They low•caste champions. All demand the le• peans, were among the dead. For the †rst went on to say: ŒIf you still think that the gal protections that the Indian state guar• time in India, too, following al•Qaeda’s ex• antees‹and often fails to provide. This ample, the terrorists targeted Jews; an Is• goes a long way to explaining why India is raeli rabbi and his wife were killed. much more violent than is often supposed. Understandably, India’s voluble Eng• In the †rst 11months of this year, according lish•speaking elite was profoundly to the Institute for Con‡ict Management, a shocked by this prominent desecration. It Delhi think•tank, nearly 2,500 Indians has become fashionable to describe the at• died in con‡ict. tacks as ŒIndia’s 9/11. But the comparison, India’s deadliest theatre is its north• though forgivable, is imprecise, for two rea• east, where nearly 1,000 have been killed sons. First, the 2001 attacks in America this year. In eastern and central India a have become almost synonymous with Maoist insurgency has claimed around the country’s bellicose response, whereas 600 lives. In Kashmir, where a separatist India, happily, has been more restrained. struggle melds into an Islamist•tinged The second reason is that outside the cos• proxy war with Pakistan, 525 have per• seted places where rich Indians and for• ished. The institute also recorded 27,000 eigners gather, Indians have long been Œcaste•crimes against dalits last year. used to con‡ict and terror. Even before Mumbai, this had been a Of mosques and temples violent year. In Jaipur, Ahmedabad, Banga• Yet apart from Kashmir, which carries a lore and Delhi, around 140 people were threat of international war, religious vio• killed in a summer bombing spree by a ter• lence may be the most worrying of India’s rorist group called the Indian Mujahideen. con‡icts. Its usual cause, discrimination As India’s †rst home•grown Muslim terro• Too many Mumbais against non•Hindus, is profoundly corrosi•1 The Economist December 13th 2008 A special report on India 11

2 v e of the state. Away from the border, India’s Maoist The rise of the BJP has contributed to insurgency is getting less attention. Its mil• Muslim and Christian grievances. During itants, known as Naxalites, after the West the 1990s it advanced from anonymity to Bengali village where they launched their national power on the back of a single is• struggle in 1967, have spent most of the in• sue: a campaign to demolish a 400•year• tervening years †ghting each other. But in old mosque in Ayodhya, in Uttar Pradesh, 2004 they united to form the Communist and build a temple to the Hindu god Ram Party of India (Maoist). Its in‡uence has in its place. The campaign was led by L.K. now spread to 220 of India’s 611districts, of Advani, the BJP’s would•be prime minister. which 76 are considered Œseriously a ect• Across India Mr Advani preached a thinly ed. The Naxalites hold little territory, veiled message of communal hate. He was apart from some roadless forest in Chhat• also present in 1992 when Hindu fanatics tisgarh and Maharashtra. But they have an demolished the mosque in Ayodhya, army of ragged revolutionaries estimated sparking Hindu•Muslim riots across India. at 12,000, and big ambitions. Over 3,000 people were killed. Increasingly, where Indians have griev• Since winning power for the †rst time ances, as recently in West Bengal over land in 1998, the BJP has improved its reputa• On Kashmir, which forms part of In• disputes, Naxalites crop up. They are a tion. Under Atal Bihari Vajpayee it also be• dia’s only Muslim•majority state, there is symptom of India’s corrupt and malfunc• came known for liberal economic man• better news‹though it might not be obvi• tioning state: thriving, in poor and crowd• agement. Many of its leaders are less ous. In June, after four years of relative ed parts of Uttar Pradesh (UP), Madhya Hinduist than nationalist. But the BJP’s calm, Indian•held Kashmir erupted into its Pradesh and Bihar, where the district ad• Hindu fanatics have not gone away. Their biggest pro•independence protests for over ministration is weakest. In the short term, champion is Narendra Modi, the demagog• a decade. They were sparked by a decision they represent a law•and•order problem ic chief minister of Gujarat. In one of In• of the state government to give land to a which India needs to address more ur• dia’s richest states investors eulogise him. Hindu shrine organisation. Over 30 protes• gently. But in the end the only solution to But rapid economic growth is not the only ters were killed by Indian troops. the Maoist problem will be the Chinese thing Mr Modi is associated with: he is one: rapid economic development. charged with complicity in a state•spon• Kashmir’s ups and downs That has already started to lessen In• sored pogrom against Muslims in 2002 These events shocked India’s government. dia’s caste divisions. Despised dalits, being that left over 2,000 dead. The Indian Muja• Since 2004, when peace talks with Paki• landless, have been quick to migrate to In• hideen identi†ed this as one of their main stan started, the death•toll in Kashmir has dia’s cities, where the caste system is al• complaints. The other was an ongoing war been falling. The local economy, heavily re• most defunct. Caste prejudices survive against Christians in BJP•ruled Orissa, liant on tourism, has been growing fast. mainly in the marriage market: in Delhi’s waged by Hindu fanatics, in which 2,000 The government in Delhi seemed to think newspapers, advertisements for a spouse churches and Christian houses have been Kashmir had become manageable. That often end: ŒSNSC‹which stands for Œsor• torched this year and over 50 people killed. happy complacency is over. But the re• ry, no scheduled castes. This attitude, the In most of India, it should be stressed, newed protests might be seen as a useful legacy of a centuries•old apartheid, will Hindus, Muslims and Christians live rede†nition of India’s problem in Kashmir. not die soon. But the urban trend in India is peacefully together. Mr Modi, who has Unlike the insurgency there, which is still against endogamy. In a study of a small been denied a visa by America, is consid• burning, the protests were indigenous, steel town in rural MP, Jonathan Parry, an ered an extremist even within his own spontaneous and mostly peaceful. Accord• anthropologist, estimated that 10•15% of party. Gujarat is also an outlier in India: at ing to Yasin Malik, a Kashmir separatist households included someone who had the con‡uence of Muslim and Hindu Asia, leader, Œour struggle has transitioned to married outside their own caste. In big cit• it has a history of religious massacres. non•violence. ies the †gure is higher. Such crises also bring out the best in In the north•eastern states, alas, India’s Even in the countryside, where caste secular Indians. Many NGOs are cam• peacemaking record is wretched. The re• prejudice is still virulent, there is surprising paigning on behalf of Gujarat’s Muslims. gion’s 42m inhabitants are among India’s change. According to a recent survey of Before an election there last year Tehelka, poorest and most rebellious. Manipur, on 19,000 dalit households in UP by research• an investigative magazine, published a the border with Myanmar, has over 20 trib• ers at the University of Pennsylvania, dalits brave report on the 2002 riots. It pointed ally based separatist groups‹and also In• were much less poor and caste•bound the †nger at Mr Modi, but he won the poll dia’s highest concentration of HIV. The than expected. In 1990 nearly three•quar• with a landslide. army’s counter•insurgency policy in Mani• ters of dalit households in western UP The government claims to have dis• pur, and across the north•east, has been to earned a living from skinning animals, an mantled the Indian Mujahideen, but a bribe the insurgents to keep quiet and Œuntouchable occupation. In 2007 this troubling precedent has been set. India is squash those who refuse. With its new in• had come down to 0.6%, apparently be• likely to su er more terrorism from ag• terest in trade, India is now taking these cause the local dalits had got rich enough to grieved Muslims which may draw a viol• con‡icts more seriously. It has made big in• refuse such employment. ent Hindu response. In September Hindu vestments in the region’s road network, This is cheering. It also raises hopes that extremists‹allegedly including a serving boosting its economy. But there is a long India may start reducing poverty faster. By army colonel‹exploded bombs in Maha• way to go before the north•east submits to contrast, there is a danger that, as India mo• rashtra and Gujarat, killing six Muslims. being Indian. dernises, religious con‡ict may increase. 7 12 A special report on India The Economist December 13th 2008

India elsewhere

An awkward neighbour in a troublesome neighbourhood

N SEPTEMBER 26th Manmohan with Africa was twice the size of China’s. It clear proliferators next door. Speaking in a OSingh expressed an unfashionable is now less than half the size, at around $30 di erent tone, Pakistanis tend to agree: set sentiment. Addressing George Bush in billion a year. But that inaugural India•Afri• against India’s recent progress, their latest Washington, DC, he said: ŒThe people of ca summit also illustrated important di er• turmoil is humiliating. India deeply love you, and all that you ences from China in India’s approach to India no longer exults, at least openly, in have done to bring our two countries clos• building its economic ties. The summit in Pakistan’s problems; it worries about er to each other. There is some evidence Delhi was dominated by private compa• them. That explains the carefulness of its for this. According to a survey by the Pew nies, which are leading India’s overseas in• post•Mumbai message to its neighbour. In• Research Centre in June, 55% of Indians ap• vestments. This helps to ensure that India dia said that the terrorists were Pakistani, proved of Mr Bush. A big reason must be escapes much of the opprobrium heaped but not that Pakistan’s government was be• the nuclear deal between India and Ameri• on China for consorting with dictators. hind them. It did not threaten Pakistan ca: it has moved India’s world. In fact, democratic India is often no with a military reprisal, as it has done after It should provide India with some use• more principled abroad than communist previous terrorist attacks. Impressively, In• ful electricity. But the deal is much more China. It refuses, for example, to condemn dia apparently did not consider withdraw• signi†cant for the country as recognition brutish governments in Myanmar, which ing from a four•year diplomatic e ort to of its growing importance in the world. has oil and gas that India needs, and in Œnormalise its relations with Pakistan. Even governments and commentators that Iran, with which it is negotiating to build a The process has been more or less disliked it‹and there were many in Eu• $7.5 billion gas pipeline. Last year, in the stalled for over a year, mainly because of rope, including this newspaper‹mostly thick of the nuclear•deal drama, America political chaos in Pakistan. But India has agreed that the existing sanctions regime, urged India to rebuke Iran. In a public state• also contributed to the deadlock. In partic• which restricted sales of nuclear fuel and ment, India told America to back o . ular, it has seemed reluctant to settle the ri• technology to India, was outworn. Most vals’ main dispute, on the status of the di• Indians considered the fact that the rich A messy part of the world vided region of Kashmir. world was rewriting its rules for India to be But India’s biggest foreign worries, as the India and Pakistan both claim all of more pleasing than any detail of the deal. Mumbai terrorist strike has shown, are still Kashmir (though oˆcially Pakistan says Referring to its passage through the 45•na• in its messy region‹especially Pakistan. In Kashmiris must decide their fate), and tion Nuclear Suppliers Group (NSG), the a sign of an enduring preoccupation with have fought three of their four wars over it. Times of India gushed: ŒIf the Beijing their neighbour, many Indians considered But both know that the current arrange• Olympics was China’s coming•out party, the nuclear deal most pleasing for having ment, in which India has the rich valley of the NSG waiver was India’s. Œde•hyphenated their country from it: Kashmir and Pakistan a poorer portion, is That was silly. But the deal has also gen• that is, for making a distinction between unlikely to change. Pervez Musharraf, who erated enthusiasm abroad. In his recent the world’s biggest democracy and the nu• resigned as Pakistan’s president in August, 1 book, ŒRivals, Bill Emmott, a former edi• tor of The Economist, calls it Mr Bush’s ŒRichard Nixon moment‹in reference to that American leader’s historic overture to China. It is safe to assume, as Mr Emmott does, that Mr Bush’s fear of a rising China, and his wish to bolster India against it, was the main motive for the nuclear detente. But what sort of rising power is India? On foreign policy, in which until recent• ly India had little interest outside South Asia, it is starting to look a bit like China. In• dia’s foreign service is still tiny, with around 600 diplomats. Its foreign trade, though rapidly growing, is also still rela• tively small. But India, like China, is in• creasingly writing foreign policy to meet its economic needs: chie‡y, access to natu• ral resources and foreign markets. That was the message of a summit In• dia held for 14 African leaders in Delhi in April. A decade ago India’s two•way trade Kashmir still divides the spirits The Economist December 13th 2008 A special report on India 13

2 h ad therefore proposed legitimising it. As a Climate Change calculates that another desh. Indian strategic thinkers, who tend sop to Kashmiris, and to Pakistani pride, he 35m will have crossed into India by 2050. If to be of a traditional bent, like to speculate also suggested that the newly demarcated only to manage climate•induced pro• about the circumstances that could drive border in Kashmir should be a soft one. blems, South Asian countries have got to India and China to con‡ict. There is no better solution. But India co•operate better. This is bold thinking: India’s armed did not trust Mr Musharraf, so it dragged its Mr Singh’s answer, to start by boosting forces are, like its economic progress, at heels. Mr Musharraf’s successor as presi• regional trade, is the best there is. His vi• least a decade behind China’s. India’s de• dent, Asif Ali Zardari, has sounded even sion is Œto have breakfast in Amritsar, fence spending is also less than half Chi• more accommodating to India: he has de• lunch in Lahore and dinner in Kabul. na’s. But India does have an advantage scribed Islamist separatists in Kashmir, for• (And wake up in hospital, diplomats josh.) over its giant neighbour in the way much merly backed by Pakistan, as Œterrorists. But there is a way to go. According to a of the world perceives it: as well•inten• But so long as Pakistan is as unstable as it is World Bank report released last year, South tioned and democratic, maybe chaotic‹ currently, India will be unlikely to bite. Its Asia is the least integrated region in the but not inscrutable and possibly malign. latest attitude of angry forbearance to• world. Trade between its members ac• wards Pakistan is, for now, probably as counted for less than 2% of their combined Diˆcult, and proud of it much peace as can be hoped for. GDP. In East Asia the †gure was 20%. That should be a big advantage for India. As a neighbour, India is itself far from From this tiny base, there is at least a Indeed the nuclear deal is testimony to it. ideal. It has a long history of meddling in promise of an advance. A regional free• But India does not often return the world’s other countries’ politics, including Paki• trade scheme came into e ect in July 2006, compliments. It demands, and increasing• stan’s. Nepal witnessed an embarrassing though its progress has been painfully ly gets, a seat at the world table, but its table example of this in April, when India had its slow. Meanwhile, two•way trade between manners are sometimes regrettable. In in• paw•prints all over the country’s †rst India and Sri Lanka, which signed a bilat• ternational negotiations, on trade and cli• proper election in a decade. Seeking to se• eral free•trade agreement in 1999, is bal• mate change, India has a habit of obstruc• cure a pliable new government, its agents looning. More important, as a measure of tionism, in which it takes unseemly pride. bribed and divided the †eld; this almost the bilateral relationship that India is start• China has pro†ted from this. At the certainly helped a party of Maoist guerril• ing to worry about most, two•way trade most recent Doha•round negotiations at las, whom India disliked most, to a stun• between India and China is climbing: from the World Trade Organisation in July, for ning victory. $4.8 billion in 2002 to $38 billion last year. example, a deal was blocked by India, Chi• That is still modest: China’s trade with na and America. But unlike its fellow pro• Subcontinental hopes South Korea is worth four times more. But tectionists, India seemed keen to take re• Bangladesh, a semi•hostile nation of 153m it is an encouraging basis for a relationship sponsibility for this failure. Its obstrep• delta•dwellers, which is currently under between two giant countries that fought a erous chief negotiator, Kamal Nath, was military rule and often under water, is an• border war in 1962 and still claim portions garlanded on his return to India‹for hav• other worry. Illegal Bangladeshi migrants of each other’s territory. Those disputes ing de†ed the Western imperialists. That are already sparking con‡ict in India’s continue to fester; last month Chinese oˆ• sort of nonsense might play well with In• north•eastern state of Assam. As the seas cials reasserted China’s claim to India’s en• dian voters, but it is bad for India’s reputa• rise, the UN’s Intergovernmental Panel on tire north•eastern state of Arunachal Pra• tion abroad. 7 Ruled by Lakshmi

Though inequalities are widening, India’s best prescription remains continued rapid growth

NDER the eye of Lakshmi, the four• West Bengal’s government, led by a pro• acquisition, for a planned petrochemicals Uarmed Hindu goddess of wealth, a business Communist poet, Buddhadeb hub, sparked violence in which at least 50 man in a suit and tie drags a small red car Bhattacharya, had o ered Tata 1,000 acres people were killed. Mr Bhattacharya was o a green paddy•†eld. Beneath this mural, of farmland. It had secured the land forced to move the hub. The central gov• in a village in West Bengal’s Singur area, through a 19th•century land•acquisition ernment, in turn, brie‡y had to put on hold farmers are feasting on kedgeree and tea. law, which gives the government the right a cherished infrastructure policy of which They are celebrating a triumph for which to take over privately owned land for the the hub was a part: a scheme for Œspecial many praise Lakshmi: a decision on Octo• public good. But out of the 13,000 people economic zones (SEZs), or enclaves for ex• ber 3rd by , chairman of the Tata who claimed a stake in the land, about port•driven businesses that o er light tax• Group and the man depicted, to abandon a 2,000 refused the government’s compen• ation and other perks. The government factory he was building on their †elds. It sation. After an opposition party, Trina• claims, optimistically, that the scheme will was to have produced the little Nano car. A mool Congress, swept local elections in give a huge boost to India’s industrial infra• well•advertised †asco, this symbolised for Singur in March, the protests turned structure and create 4m new jobs by the many India’s next big problem: its diˆcul• bloody. Mr Tata pulled the plug. end of next year. Most states have also ex• ties in making land available for industrial This sort of thing has happened before empted SEZs from some labour laws. development. in West Bengal. Last year another bungled Even by India’s teeming standards, 1 14 A special report on India The Economist December 13th 2008

2 West Bengal presents an extreme case of on India’s performance. This explains, for the diˆculties inherent in providing indus• example, why the World Bank rates India, try with land. Over 60% of the state is culti• which is home to many excellent compa• vated, so most green†eld schemes involve nies, as only the world’s 122nd•best place moving peasants‹and where peasants to do business‹45 places behind Pakistan. have votes, this can be diˆcult. Yet the pro• Sadly, there is not much evidence that blem is not insuperable. Some 200,000 rising standards in India’s better states are hectares (500,000 acres) of land has al• percolating to their backward neighbours. ready been secured for SEZs, much of it A recent study by two economists, Laveesh purchased directly by the developer. The Bhandari and Bibek Debroy, rated India’s boss of Tata’s automobile division, Ravi states on eight social and economic mea• Kant, says that compared with infrastruc• sures, on an overall scale of one to ten. The ture bottlenecks, getting hold of suitable †ve worst, which accounted for one•third land is a minor problem. Tata Motors has of India’s population, scored 1.5 or less. bought or been provided with land for There are just a few promising signs: for ex• four big green†eld developments this year, ample, in Bihar, the state government of in Karnataka, Maharashtra, Uttarakhand Not the best place to do business Nitish Kumar has been much better than and, as the Nano’s new home, Gujarat. its predecessor. But how much improve• It is also reasonable to hope that deba• 2001. This does not deal with the problem ment it can bring to an abjectly poor state cles like Singur will teach state govern• of India’s labour laws, which remain a se• of 90m people, where only a third of the ments to acquire land more carefully. A pu• rious disincentive for the large•scale women can read, remains to be seen. tative new law, drafted by the central manufacturing the country needs. But it il• As India’s economy grows rapidly, so government, would provide better com• lustrates one reason why India’s prospects will the regional disparities. Of 260 SEZs pensation, including jobs, for the dispos• are less bleak than they sometimes seem. that have so far been fully approved, a big sessed. Also encouraging, though not for majority are in India’s richest states, in• the disconsolate Mr Bhattacharya, was the The rich are getting richer cluding 42 in Tamil Nadu, 38 in Maharash• way †ve states conspicuously competed to Competition between the states, especial• tra and 23 in Gujarat. This trend will exacer• o er the Nano a new home. In choosing ly since the 1991 reforms, has widened the bate Indians’ existing grievances and Gujarat, Mr Tata compared the helpful eˆ• already huge disparities between them. perhaps lead to more con‡ict. Managing ciency of its chief minister, Narendra The richer, better•run and more literate this schism e ectively would require en• Modi, with the Trinamool Congress’s states‹broadly, western India‹have lightened and skilful government, of rabble•rousing leader, Mamata Bannerjee. proved more attractive to investors than which India has too little and not much It jarred with many people to hear the the poorer, more chaotic ones in the east. prospect of more. But, more important, it hate•mongering Mr Modi praised. Yet Mr Between 1999 and 2008, when the Indian will require sustained high economic Tata is a hugely respected †gure in India‹ economy grew at an average annual rate of growth. So long as that happens, and it even the farmers feasting in Singur spoke 7.3%, many richer states grew faster: Guja• should, India’s emergence will continue. It highly of him‹so this should serve as a rat at 8.8%, Haryana at 8.7% and Delhi at will not come as quickly as Indians want, warning to all India’s political spoilers. 7.4%. Among the poorest and most popu• or as quickly as it might, but it will be re• As competition among states grows, lous states, Bihar grew at 5.1%, Uttar Pra• lentless. It will be sometimes exhilarating some hope that the overall performance of desh at 4.4% and Madhya Pradesh at 3.5%. and often frustrating to watch. There is no state governments will improve. That These parts of the country are a huge drag country more remarkable. 7 would be an enormous help. Many of the areas described in this report, including in• O er to readers Future special reports frastructure, education, land and labour, Reprints of this special report are available at a Business, †nance, economics and ideas are wholly or mostly controlled by them. If price of £3.50 plus postage and packing. 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