Regulation and Liberalization Theology in India Author(s): Stanley A. Kochanek Reviewed work(s): Source: Asian Survey, Vol.

26, No. 12 (Dec., 1986), pp. 1284-1308 Published by: University of California Press Stable URL: http://www.jstor.org/stable/2644548 . Accessed: 24/11/2011 04:27
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AND LIBERALIZATION REGULATION IN THEOLOGY INDIA

Stanley A. Kochanek
Rajiv Gandhi took office as India's youngest Prime Minister on October 31, 1984. Rajiv inherited from Indira Gandhi, his mother, a nation that was becoming increasingly divided, a sluggish economy seemingly incapable of sustained, rapid growth, and a society dominated by scarcity, corruption, and black money. Upon securing an overwhelming electoral mandate, Rajiv placed the issues of unity and integrity of the nation, the economy, and corruption at the top of his policy agenda and moved quickly and decisively to deal with them. In his first year in office, he succeeded in reaching accords on the long-smoldering conflicts in Punjab and Assam, accelerated the process of liberalization of the economy that had been moving along slowly for the previous decade, and launched an indirect attack on corruption by passing an antidefection law and restoring the legality of company donations to political parties. These initial successes, however, proved to be short-lived. By the early months of his second year in office, the honeymoon was over. The Punjab accord began to unravel, communal violence began to flare up, and the economic mood became less buoyant. The image of Rajiv as young, dynamic, and decisive began to erode as critics increasingly accused him of vacillation, indecisiveness, and political immaturity. The apparent order, stability, and euphoria that had characterized Rajiv's first year in office were clearly deceptive and expectations totally unrealistic. This was not the first time in recent Indian political history that a party had come to power on a tidal wave of popular support only to experience substantial difficulty in translating its goals and objectives into effectivepolicy and meeting rising popular expectations. Both Indira Gandhi and her Congress (I) in 1971-72 and the Janata Party in 1977 learned that winning elections does not guarantee the ability to govern. Both parStanley A. Kochanek is Professor of Political Science, Pennsylvania State University, University Park, Pennsylvania. ( 1986 by The Regents of the University of California

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ties were swept to victory with massive popular support. Both embarked upon a program of political or social transformation. Yet both saw their efforts falter in the wake of a series of seemingly intractable problems. The Indira wave that had swept Indira Gandhi's Congress to power in 1971-72 proved to be the pinnacle of her career. Indira led a minority party to a massive victory at the polls, saw her army defeat India's arch rival Pakistan in a war that established Indian preeminence on the subcontinent, and embarked on a major effort to transform Indian society and politics. Within a year of her great electoral triumph, however, successive droughts, a quadruplingof oil prices, and rampant inflation set in motion a series of events that led to near economic and political collapse. The result was the declaration of a national emergency that lasted 20 months and all but suspended the democratic political order created by India's founding fathers.1 The end of the emergency was followed by the first defeat of the Congress Party since independence and the triumph of the Janata Party. Again India seemed on the verge of a new beginning. The Janata government succeeded quickly in restoring the political order but proved to be incapable of providing stability or coping with India's economic and social problems. The euphoria quickly died and the Janata collapsed into a bewildering array of warring factions. India appeared to be adrift for a second time in less than a decade, and Indira Gandhi was swept into office in a remarkablepolitical comeback. Her return to power, however, produced very limited results.2 Prior to her assassination on October 31, 1984, it was generally believed that Indira Gandhi and her party would be returned to power with only a bare majority at best or as the largest party in a coalition government. The assassination and Rajiv's succession to the prime ministership, however, totally altered the picture. Rajiv was catapulted to power in an electoral victory that surpassed those of Jawaharlal Nehru, his grandfather,and his mother Indira Gandhi. Rajiv's victory, however, came against a background of fear, cynicism, and uncertainty. As was the case in 1971 and 1977, the electoral mandate of 1984 generated enormous popular expectations that even Rajiv admitted were abso-

1. See Stanley Kochanek, "Mrs. Gandhi's Pyramid: The New Congress," in Henry C. Hart (ed.), Indira Gandhi'sIndia: A Political System Reappraised(Boulder, Colorado: Westview Press, 1976), pp. 93-124, and Stanley A. Kochanek, The Congress Party of India (Princeton: Princeton University Press, 1968), pp. 407-447. 2. See Myron Weiner, India at the Polls, 1980 (Washington: American Enterprise Institute, 1983).

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lutely "scary."3 Past experience has demonstrated that fulfilling these expectations would not be an easy task and that success would depend upon a variety of factors, some of which were beyond Rajiv's control. The long-term effectiveness of Rajiv's performance will depend very heavily on the level of cooperation he can secure from the non-Congress states, his own party, and the vast, entrenched bureaucracy. It will also rest on the new Prime Minister's ability to manage successfully the disruptive consequences of the economic policy changes he has introduced. In addition, however, the long-term achievement of Rajiv's policy objectives, especially in the economic sphere, will depend also on a variety of factors that lie beyond his control. These include good monsoons, adequate levels of external financial support, and the availability of foreign markets for Indian goods. In short, Rajiv's long-term success is far from assured and style alone will not achieve his objectives.

The Liberalization Formula

Among the most difficult tasks faced by Rajiv is his effort to accelerate India's rate of economic growth through a process of liberalization of one of the most comprehensively controlled and regulated economies in the non-Communist world. The Indian model of development, which Nehru called the socialist pattern of society, emerged from a set of strategic choices that were outlined in the Industrial Policy Resolutions of 1948 and 1956. These choices in turn were institutionalized by a process of incremental growth over the next three decades and further developed and elaborated upon by the populist movement of the 1969 to 1973 period. The development model that was created was based on centralized planning, a mixed economy dominated by a hegemonic public sector, and a private sector in which all basic management decisions involving investment, production, technology, location, prices, imports, exports, and foreign capital were controlled and regulated by the state.4 In theory, the model was designed to ensure that the economy would grow rapidly in a planned and self-reliant direction; that the private sector would invest only in high priority industries approved by government; that monopoly and concentration of economic power would be forestalled; that the state would come to control the commanding heights of the economy; and that steep tax rates for individuals and corporations would provide the resources for the plan, check the conspicuous consumption of the rich, and create a society based
3. India Today, February 15, 1985, pp. 8-11. 4. Robert L. Hardgrave, Jr., and Stanley Kochanek, India: Governmentand Politics in a DevelopingNation (New York: Harcourt Brace Jovanovich, 4th edition, 1986), pp. 308-335.

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on social justice. In practice, however, the approach resulted in slow rates of growth, massive corruption, and an economy of shortages.5 Although Rajiv insisted that he remained committed to the basic strategy and consensus of the Indian development model, he began introducing a series of far-reaching changes in traditional economic policies in the fields of taxation, industrial licensing, control of monopoly and foreign capital, import/export rules, and planning objectives. These changes have had the cumulative effect of shifting the center of gravity of the traditional Congress party economic policy away from its left-of-center, socialist, and regulatory orientation toward a more centrist, private sector, marketoriented approach. Politically, this meant moving away from Indira Gandhi's focus on Garibi Hatao (abolish poverty) and her appeals to the bottom 40% to 50% of India's urban and rural poor to a strategy designed to appeal to the top 10% of the population, which represents India's new urban-based, middle-class, "yuppie" community. It was hoped that the pent-up demand of this large, new domestic market of an estimated 100 million would provide the consumer base for an accelerated and sustained pattern of economic growth. Stung by repeated charges that his new economic policy was pro-rich, however, Rajiv quickly moderated his course in early 1986 by placing renewed emphasis on his mother's old 20-Point Program which was designed to help the poor. Moreover, in order to help pay for these new antipoverty programs, he was forced to increase taxes on business and the middle class, which dampened their enthusiasm for India's version of Deng Xiaoping. The broad outlines of Rajiv's new economic policy were initially spelled out in his first budget introduced in March 1985.6 The budget marked a series of significant changes in attitude, especially in the field of taxation, and emphasized the need for closer coordination of fiscal, industrial, and trade policies in order to facilitate modernization and more rapid economic growth. The budget reduced the traditionally high rates of individual and corporation taxation, abolished estate duties, and lowered wealth tax rates. The objectives of these changes were to spur economic growth, enhance compliance, generate more revenue at lower rates, and reduce corruption and the size of the black economy. Income on which taxes were evaded under existing laws had become one of the major sources of black money in the Indian economy. A recent government study had in fact estimated that tax-evaded income in 1980-81 was 243% of tax5. Prem ShankarJha, India: A Political Economy of Stagnation (Bombay: Oxford University Press, 1980). 6. India Today, April 15, 1986, pp. 22--32.

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assessed income, or two-and-a-half times the income on which taxes were actually paid.7 Previous studies had reached similar conclusions.8 Thus, it was argued, lower rates would enhance compliance and generate more revenue than the extremely high rates of the past, which may have satisfied egalitarian sentiments but resulted in corruption and serious problems of compliance. Although Rajiv's second budget in early 1986 retained most of his earlier tax reforms, he moved quickly to try to offset his increasingly pro-rich image. Excise taxes on cars, television sets, and refrigeratorswere raised sharply, taxes on business were altered, and the government announced unprecedented increases in outlays for antipoverty programs. These programs had previously been dismissed by Rajiv's inner circle of advisors, but enjoyed considerable support among Gandhians, socialists, and leftist Congressmen concerned about issues of poverty and social justice. As a result of this shift in tax policy, the stock market plunged from its highs of the year before, the middle class was up in arms, and small business threatened to launch a nationwide protest. Rajiv's most vocal supporters now became his chief critics.9 Changes in tax policy have been accompanied by selective alteration of India's comprehensive, complex, and overlapping industrial regulatory system. Under the Indian model of planned economic development, all private sector activity and private foreign investment were subject to a vast array of laws, rules, and regulations involving nearly 50 categories of approvals, depending on the nature and complexity of the project.10 These approvals might entail as many as 150 to 170 individual clearances and could take two to three years to obtain as files moved horizontally and vertically through the complex Byzantine bureaucratic maze of the Secretariat system created by the British.1" The three most important instruments regulating indigenous and foreign capital in India are the Industries Development and Regulation Act (IDRA) of 1951, the Monopolies and Restrictive Trade Practices Act (MRTP) of 1969, and the Foreign Exchange Regulation Act (FERA) of 1973. These statutes are not only comprehensive in their own right but
7. See National Institute of Public Finance and Policy, Aspectsof the Black Money in India (New Delhi: NIPFP, 1985), and India Today, July 15, 1985, p. 70. 8. See Jha, pp. 45-61. 9. See India Today, March 31, 1986, pp. 56-58; The Far Eastern Economic Review, March 13, 1986, pp. 38-39. 10. See K. V. Iyer, Clearancesfor Industrial Projects (New Delhi: Indu Publications, 1983) and K. V. Iyer, Guide to Industrial Approvals(New Delhi: Indu Publications, 1983). 11. Stanley A. Kochanek, "The Politics of Regulation: Rajiv's New Mantras," The Journal of Commonwealthand ComparativePolitics, 23:3 (November 1985), pp. 189-21 1.

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they also overlap and duplicate each other in a variety of ways. This results in the necessity for each entrepreneurto obtain a series of sequential, repetitive, and time-consuming approvals. The IDRA of 1951 is the centerpiece of the industrial regulation system. It regulates investment, expansion, location, prices, distribution, and almost every other dimension of private sector operations. The MRTP Act was superimposed upon the IDRA in 1969 and has developed its own definitions, rules, administrative apparatus, and approval procedures. It is designed to regulate and control monopoly, the concentration of economic power, and restrictive and monopoly trade practices. FERA is designed to control and regulate multinationals and private foreign capital in India. Taken together, these regulatory instruments control the size, product choice, location, production, and almost every significant management decision of a private sector firm. Rajiv has taken a variety of steps to liberalize each of these regulatory instruments as part of an overall process of alteration and selective deregulation. The changes he has introduced, however, retain the basic structure of the regulatory system. They do not dismantle or replace it. In fact, many of the techniques of selective alteration being used by Rajiv to encourage the private sector to improve its efficiency, productivity, modernization, and competitive performance have been used in the past. Yet, past experience has shown that these techniques have had limited long-term success. Direct control of the private sector in India has generally been most successful as a negative instrument designed to block particular action. Controls have been much less successful as positive devices designed to encourage or compel action in desired directions.12 Moreover, the changes that have been introduced are largely ad hoc; they are hemmed in by a variety of conditions and therefore depend very heavily on how they are interpreted and implemented. The Government of India has taken a variety of steps under the IDRA to selectively decontrol and deregulate key industries in an effort to spur production, diversification, and modernization. In an attempt to encourage the growth of small and medium-sized industry, the government has delicensed some 25 major industries. These industries range from electrical equipment and components to automotive ancillaries, machine tools, office equipment, and some essential drugs. This change enables small and medium businesses to bypass the time-consuming licensing procedures that require each entrepreneurto obtain an industrial license before creating or substantially expanding a unit in one of these industries. In another
12. See, for example, Report of the Study Groupon Industrial Regulations and Procedures, Ministry of Industry, February 1978.

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major change, the government has also introduced the concept of broadbanding of industrial licenses so that a manufacturerof one product would be allowed to automatically diversify into similar products falling under the same generic category without first obtaining a fresh license. Under this change, producers can adjust their product mix in response to market demand. Thus, for example, a company producing trucks would now be able to produce other four-wheeled vehicles like cars as long as the total production does not exceed its overall licensed capacity.13 Finally, the government has altered the IDRA and other statutes to enable big business and foreign multinationals to establish industries in backward areas without first obtaining government approval.14 The modifications in industrial licensing policy introduced by Rajiv were part of a longer term effort by Indian planners to allow industry to expand and modernize in an attempt to achieve economies of scale. Under Indian law, it is illegal for a firm to produce more than its authorized, licensed capacity without first seeking government permission. In response to repeated criticism from business that India was the only country in the world that made growth in production a crime even if achieved by increases in productivity, the government agreed to allow a 5% automatic growth in capacity subject to a maximum of 25% over a five-year period for selected industries. It also agreed to regularize illegal capacity created in excess of licensed or registered capacity by companies in 34 industries whose products are classified as core or mass consumption items. As part of this trend, Rajiv's government has now agreed to allow up to a 49% rise in capacity if it results from a firm's attempt to modernize its facilities. These changes have been designed to attempt to cope with the increasing growth of sick industries that were unable to achieve viable or profitable rates of production.15 Liberalization in industrial licensing has been accompanied by significant modification of the MRTP Act. The MRTP Act was passed in 1969 as part of the populist movement that accompanied the split in the Congress and Indira Gandhi's struggle for control of the party.16 The new monopoly law was superimposed on the existing IDRA and was also unique in defining monopoly in terms of size of assets and not simply in
13. See India Today, November 15, 1984, pp. 88-89; India Today, October 15, 1985, pp. 62-63; Far Eastern Economic Review, January 17, 1985, pp. 50-58. 14. The Economic Times (New Delhi), January 3, 1986. 15. Business Standard (Calcutta), January 5, 1986; Financial Express (New Delhi), January 2, 1986. 16. See Stanley A. Kochanek, "Symbolic Politics: Monopoly Legislation in India" (forthcoming).

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terms of control over market share. This approach was aimed primarily at controlling the concentration of economic power in the hands of India's large, family-controlled conglomerates like Birlas and Tatas, the two largest industrial houses in the country. Under the MRTP Act, an undertaking that by itself or along with other interconnected undertakings has assets of not less than 200 million rupees had to register and was designated an MRTP company. Once registered, the undertaking became subject to regulation under the act, which entailed additional, detailed, and parallel scrutiny in all cases of substantial expansion, creation of new undertakings, or any acquisition, takeover, merger, or amalgamation.17 Rajiv's March 1985 budget raised the asset limit for MRTP companies from 200 million to one billion rupees. This fivefold increase in asset limits was estimated to have freed about 40% of the 1334 companies registered under the act from the time-consuming procedures that MRTP regulation entailed.18 In another change, MRTP companies were allowed to totally bypass even the new asset limits in the case of selective industries. Under this modification, MRTP companies were completely exempted from sections 21 and 22 of the act, which covered substantial expansion or the creation of new undertakings,provided they invested in any one of a list of 27 high-priority industries including electronics, chemical plants, autos and other vehicles, and oilfield services.19 Since the Indian regulatory system is extremely complex and overlapping, it is difficult to change one part of the system without creating inequities in other parts of the system. As a result, once Rajiv raised the asset limit for MRTP companies to one billion rupees, he was immediately confronted by a new set of demands by business to raise the asset limit for dominant undertakings. Under the MRTP Act, a dominant undertaking is a unit that by itself or along with interconnected undertakings produces, distributes, or otherwise controls not less than 25% of the total goods and services and whose assets exceed 10 million rupees.20 The definition of a dominant undertaking comes much closer to the traditional definition of monopoly based on control of market share. There is considerable pressure to alter both components of the definition of a dominant undertaking. Business has demanded that the asset limit be raised from 10 million to 30 million or even 50 million rupees and is also pressing for an increase in the
17. See H. M. Jhala, The Law of MAR.T.P.In India (Bombay: N.M. Tripathi Private Limited), 1981. 18. The Economic Times (New Delhi), June 8, 1985, and October 30, 1985. 19. Ibid. 20. The initial market share of a dominant undertakingwas set at one third. See Jhala, pp. 14-15.

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proportion of market share that must be controlled before a company can be considered a dominant undertaking.21 The changes introduced or contemplated in the MRTP Act have been added to previous alterations made since 1980 to modify the law substantially. Over the past few years, the MRTP Act has been altered to exempt exports performance from the output criteria of a dominant undertaking and also to exempt expansion for modernization, replacement, or renovation from Sec. 21 of the act, which requires approval for any substantial expansion of an MRTP unit. Companies could also be exempted from Sec. 21 if they were of high national priority, produced exclusively for export, or operated in a free trade zone.22 The main legal instrument for regulating the operations of foreign controlled companies in India is the Foreign Exchange Regulation Act of 1973. Companies regulated under this act are referred to as FERA companies. In an effort to upgrade technology, develop India's backward regions, and spur greater competition between large Indian MRTP companies and foreign multinationals, the government has embarked on a liberalization of its policies toward private foreign capital. FERA companies have received the same exemption from licensing in the 27 industries exempted under Sec. 21 and 22 of the MRTP Act,23 and government has insisted that it will be very flexible in applying equity restrictions on foreign high tech companies.24 In December 1985, the government announced that MRTP and FERA companies would be exempt from licensing requirementsfor 22 key industries and would be allowed to invest in 17 other industries that had previously been closed to them, provided they were prepared to locate their units in designated backward areas that had little or no industry. Of course these areas were also unlikely to have much in the way of infrastructure such as roads, railroads, power, water, housing, schools, or a trained manpower pool. As an additional incentive, MRTP and FERA companies that agreed to take advantage of these provisions would also have their export obligations for these units reduced or eliminated depending upon the industry and the characteristics of the districts in which the plant was located.25

21. See The Economic Times (New Delhi), September 26, 1985, and October 26, 1985. 22. The Economic Times (New Delhi), June 6, 1985; Financial Express (New Delhi), June 12, 1985. 23. The Economic Times (New Delhi), May 10, 1985. 24. Ibid., May 11, 1985. 25. Financial Express (New Delhi), December 27, 1985; The Economic Times, December 26, 1985.

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Under Rajiv's leadership, regulatory policies have also been altered significantly for the small-scale sector and for key selected industries such as textiles, computers, electronics, and telecommunications. In an effort to allow more flexibility for growth, the limit on investment by small-scale units and ancillaries has been raised from 2 million and 2.5 million rupees to 3.5 million and 4.5 million rupees, respectively. Industries falling under these categories are entitled to a variety of financial and tax benefits and are not subject to India's comprehensive labor laws. Although these industries are also free of India's industrial licensing requirements, they are still required to obtain a wide variety of other permissions like their larger industrial associates.26 Of all the changes made in regulatory policies toward particular industries, none is as significant or symbolically important as Rajiv's new textile policy. The textile industry is the largest and most important traditional industry in India and the country's largest industrial employer. It is almost a microcosm of the developmental, ideological, and employment dilemmas confronting Indian industry. The Indian textile industry is divided into three key sectors: the mill sector, the powerloom sector, and the handloom sector. Since independence, the industry has been one of the most comprehensively controlled and regulated industries in the county. A government committee reviewing controls in 1979 found the system of controls over the textile industry to be "so many and so complex that few people really know what the system of control is."27 One of the major objectives of India's regulation of the textile industry has been to prevent competition between the mill sector and the more labor intensive powerloom and handloom sectors in an effort to maximize employment in the industry. Since the handloom sector contributes only a very small proportion of the total cloth production in the country, the real conflict has been between the powerloom sector and the mill sector. The powerloom sector is composed of over 800,000 legal units and as many as an additional 200,000 illegal units. Under Indian law, powerloom units must consist of no more than four looms each, and these units are exempt from India's labor laws and are freed from paying a variety of taxes. The powerloom sector produces 45% of all the cloth in the country. In an effort to protect the powerloom industry, the mill sector was deliberately prevented from expanding its weaving capability, but it was allowed to
26. M. N. Panini, "Networks and Styles: Industrial Entrepreneursin Faridabad," in Satish Saberwal (ed.), Process and Institution in Urban India (New Delhi: Vikas Publishing House Pvt. Ltd., 1978), pp. 91-115. 27. Government of India, Ministry of Finance, Report of the Committee on Controls and Subsidies (New Delhi: Ministry of Finance, May 1979), p. 35.

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develop its spinning capability so as to supply yarn for use by the powerloom sector. As a result, in 1984 there were only 281 composite mills in India but 622 spinning mills.28 Rajiv's new textile policy is designed to change all of this as part of an effort to enhance the production, competition, and efficiency of the industry. Under the new policy, government will gradually remove all curbs on the expansion of mill capacity, close unprofitable units, allow production of blended fabrics rather than just cotton, eliminate tax preference for the powerloom sector, lower raw material costs, and register all powerlooms in an effort to raise the overall efficiency and productivity of the industry. This policy, however, will face enormous resistance from workers, trade unions, powerloom owners, and Gandhian supporters of village and cottage industries. The substantial alteration of the industrial regulatory environment has been accompanied by further liberalization of import and export controls. Again the objective has been to enhance competition, provide greater scope for market forces, and upgrade scientific and technology development. The process of import liberalization in India has been going on for several years, but its scope and character has changed. Import liberalization received its first major thrust under the Janata government from 1977 to 1979. Remittances from Indians working in the Gulf had swelled India's foreign exchange reserves in the late 1970s and enabled the government to relax some of its restrictions. The process was accelerated as a result of the conditionality attached to India's massive $5.3 billion IMF loan initiated in 1982-83. Building on this process, Rajiv has gradually opened up the Indian economy to external competition even further. Some 778 new items, mostly raw materials and components, were allowed to be freely imported under an Open General License (OGL), and the import of capital goods for modernization was substantially expanded in an effort to enhance competitiveness and efficiency.29 Perhaps the best indication of the overall scope of the changes in attitude toward regulation, controls, and planning under Rajiv are reflected in the outline of India's new Seventh Five Year Plan (1985-89). Although the plan is designed to spell out a specific program for the next five years, it also attempts to outline the broader objectives for India for the year 2000. By the turn of the century, the plan envisions the emergence of India as a modern industrial society and a welfare state in which poverty and illiteracy will be eliminated, full employment will be achieved, basic needs will be met, and health care will be available for all. For the immediate future
28. India Today, June 30, 1985, pp. 82-83. 29. Economic and Political Weekly (Bombay), May 18, 1985, pp. 869-871.

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the plan calls for a growth rate of 5% a year in GNP for the period 1985 to 1989 and an 8% growth rate for industry. As part of this massive effort to achieve higher rates of industrial growth, the private sector has been assigned a very prominent role for the first time in decades. Private sector investment levels are to be increased substantially to 52% of plan outlays, new areas of production are to be opened to the private sector, and there is to be greater competition between the public and the private sectors in an effort to increase the efficiency and productivity of both.30 In contrast to the massive expansion of the private sector envisioned in the Seventh Plan, the public sector is to concentrate its attention on consolidation. The public sector is expected to focus on improvement in management and efficiency of existing units, completion of existing projects, and selective expansion in the development of infrastructure such as power. This shift in the relative relationship between the public and private sectors is reflected in the fact that for the first time in decades private sector investment levels will exceed those of the public sector. To some extent this decline in public sector investment levels to below 50% is a result of a severe shortage of government resources. However, it also reflects increased disillusionment with the performance of the public sector in past years and its failure to live up to expectations.3

The Impact of Liberalization

The changes in economic policy introduced by Rajiv have generated enormous optimism and expectations both at home and abroad. While it is generally agreed that it will take several years for Rajiv's new economic policy to produce results, supporters point to a variety of immediate, measurable gains. Corporate profitability for 1984/85 improved significantly. There was a brief boom in the Indian stock market, and a buoyant investment climate resulted in the initiation of a large number of new projects and new investment. At the same time, however, one must not lose sight of the large number of obstacles that must be overcome in any effort to transform the complex and sweeping character of the regulatory system that India has developed over the past 40 years. Restrictions on entry and exit, expansion, location, size, production, and spheres of investment still exist and will continue to affect efficiency, cost, and quality. Moreover, the ideology of the socialist state remains in place, and Rajiv must periodically reaffirm his commit30. India Today, September 15, 1985, p. 76; India Today, November 14, 1984; Financial Express (New Delhi), November 13, 1985. 3 1. Ibid.

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ment to it in order to placate the rank and file of his party. In keeping with this ideology, government officials continue to play a massive role in directing, controlling, and regulating almost all areas of private-sector corporate activity. As a result of these limits, there are basically two points of view concerning the prospects for the long-term success of Rajiv's attempt at transforming the Indian system. One point of view argues that Rajiv will succeed in his effort to transform the system. The changes he has made or is contemplating, it is argued, will lead to a new dynamic process of development and growth similar to the golden decade of development from 1955 to 1965. Another view, however, holds that the system will simply overwhelm him as it did his mother and his long-term impact on the economy will be minimal.32 In the wake of this failure, it is argued, India would shift sharply to the left in an effort to restore a controlled and regulated system. What are the sources of these divergent opinions? What are the obstacles facing Rajiv in his effort to transform the system? What are the potential long-term possibilities for success? Is liberalization the answer to India's development malaise?

Obstacles to Liberalization
Regulation in India as elsewhere has suffered from a series of life-cycle rigidities which have resulted in massive delays, an absence of innovation, and a lack of flexibility in decision making.33 These rigidities have been compounded in the Indian case by the comprehensive character of the regulatory universe, the inflexible procedural routine of the secretariat system, and the increased politicization of the entire process. Since the 1960s, therefore, some effort at alteration of the system has always been in progress. Fundamental changes in the system, however, have been less frequently discussed because of the enormous stakes that bureaucratic political and business elites have in the existing order and the strong ideological commitment to government control and regulation of the economy on the part of the socialists, communists, and Gandhians both within and outside of the Congress. As in the past, therefore, the process of liberalization taking place in the Indian regulatory system under Rajiv is an effort at alteration of the existing order. It is not designed to dismantle or replace it. The notion that entrepreneurscan secure across-the-board approvals without having been looked into by the different agencies concerned is unlikely in the Indian
32. Far Eastern Economic Review, January 17, 1985, pp. 50-58. 33. Anthony Downs, Inside Bureaucracy (Boston: Little Brown, 1967), p. 160.

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climate.34 Thus, problems of implementation become critical. Even the mechanisms of alteration being employed by Rajiv are hardly new. In fact, they have become a part of the very system itself and have been used repeatedly in the past during India's periodic efforts at liberalization. These mechanisms include increases in threshold levels or cutoff points in defining those who are regulated, the device Arun Shourie once called the "computerization syndrome," and a process known as stripping or selective deregulation.35 These devices have generally been employed each time the system became overloaded and was confronted by inordinate delays. They have now become the instruments of the new government, which claims not only to work but to work faster. The cutoff solution is a device that has been employed in the areas of industrial licensing, the MRTP Act, and the small-scale sector. This solution was first used in dealing with problems of industrial licensing, India's oldest and most sweeping regulatory instrument. Since the licensing system became periodically overwhelmed by applications, the cutoff solution was used to reduce the case load of the regulators and allow them to spend more time on the larger, more significant applications. As early as 1962, the Government of India first decided to exempt undertakings with fixed assets of one million rupees from the licensing requirement.36 The rupee threshold was then raised to 2.5 million in 1963, 10 million in 1970, 30 million in 1978, and 50 million in 1983. Despite pressure from the business community, a committee of Secretaries of the Government of India rejected a proposal by the Industry Ministry in September 1985 to raise the limit to 100 million rupees.37 The threshold approach has now also been accepted in the case of the MRTP Act. The asset limit for the designation of an MRTP company was raised in March 1985 from 200 million to one billion rupees, and there is a proposal to raise the asset limit for a dominant undertakingfrom 10 million to 50 million rupees. The threshold limits used to define the small-scale sector and ancillaries have also been raised. The process of raising the threshold limits or cutoff points under various regulatory statutes is bound to continue as inflation, the increasing cost of imported machinery, and construction expenses continue to rise.

34. The Economic Times (New Delhi), September 29, 1985. 35. Arun Shourie, "Controls and the Current Situation: Why Not Let the Hounds Run," Economic and Political Weekly, special number August 1973, and "On Citing the Scriptures," Economic and Political Weekly, August 25, 1973. 36. Matthew J. Kust, Foreign Enterprise in India: Laws and Policies (Chapel Hill: The University of North Carolina Press, 1964), p. 116. 37. Financial Express (New Delhi), September 17, 1985.

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Such changes become essential as a mechanism for reducing the case load of the regulators and preventing a total breakdown of the system. The "computerization syndrome" as a solution to data management in the regulatory arena preceded Rajiv's entry onto the Indian scene. Proposals to computerize the system in an effort to organize, control, and manage the vast amounts of data required and the thousands of applications for approvals received each year have been made repeatedly in the past. Detailed studies had revealed, for example, that in a single meeting of the Licensing Committee in which hundreds of cases had to be considered, one application emerged from the scrutiny process with a recommendation that the application be rejected on the grounds that adequate capacity already existed in that industry. Yet, in the same batch of files, another application had been recommended for approval for production of the exact same item on the grounds that the existing capacity was inadequate! Clearly closer monitoring was required.38 Despite these anomalies, however, computerization of the system has traditionally been resisted because the very flow of paper and information in the system was a source of power, patronage, and money. Each application for approval is handled separately and must travel through the timehonored routine procedures of the secretariat system. Those who control the flow of paper, information, and the file from the lower level dealing clerks and section officers to the higher level bureaucratic and political regulators have enormous stakes in the existing procedures. Even members of the business elite have learned to use the process for their own ends by pushing their files ahead while simultaneously blocking the files of potential competitors. To the lower levels of the bureaucracy the existing procedures for handling information and files were the source of "tea money." To the higher echelons of the bureaucracy they were the source of power and patronage. To the political regulators they were an extractive mechanism that could be used to obtain political contributions. Finally, to the business elite they were the mechanism for securing exclusive rights and blocking entry of competitors.39 It is little wonder that past efforts to implement the computer solution have failed. A third approach used to alter the regulatory system is a process of selective deregulation, or stripping.40 Stripping involves the creation of special categories and special circumstances that permit the applicant to bypass parts of the regulatory system on a selective basis. It simply states
38. Kochanek, "The Politics of Regulation," p. 202. 39. Ibid., pp. 203-210. 40. Barry M. Mitnick, The Political Economy of Regulation (New York: Columbia University Press, 1980), pp. 429-430.

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that certain regulatory provisions will not apply if certain conditions are met. Thus the applicant may be exempted from obtaining an industrial license or from MRTP asset limits if he invests in designated high technology industries, locates in a backward area, establishes a unit in an export promotion zone, invests in high priority, intensive industries, etc. This approach is designed to use freedomfrom regulation as an incentive device to get business to act in a particular way. Rajiv has used this mechanism in a variety of ways in his effort to increase production, efficiency, exports, and productivity. Past experience has demonstrated, however, that regulation in India has been most successful as a negative instrument. It works very well in preventing people from acting in a particular way. It has not proven to be a very effective incentive device when it is aimed at trying to encourage desired business behavior. Rajiv's liberalization of the Indian regulatory system, in short, may be more comprehensive than previous efforts, but it is neither original nor especially innovative. It does not mark a fundamental transformation of the system but is more a return to the less restrictive pattern of the 1950s. It reduces the incidence of what had become an increasingly unmanageable regulatory universe. As one business executive conceded, "If before we needed 50 permissions now we need only 45."41 The basic outlines of the legal and administrative structure remain in place, and the increased list of exceptions has simply increased the vast discretionary powers of the bureaucracy. As a result, Rajiv remains heavily dependent upon the bureaucracy for the successful implementation of his reforms. It is this enormous reliance upon the bureaucracythat has led many observers to believe that the system may simply overwhelm him. The bureaucracy'sapproach to alteration of the regulatory universe has been exceedingly cautious and its implementation sluggish. Each change has been highly circumscribed by a series of if's, and's, and but's. This seemingly unending list of complex conditions has been accompanied by a series of proceduralbottlenecks, a reluctance to make decisions, and a failure to ensure proper coordination. As a result, there continues to be a gap between policy and implementation as policy changes somehow fail to percolate down to the operational level. As one leading business executive put it, "a great deal still has to be done on administrativeprocedures. Policy is one thing and implementation another."42 Another business leader said that liberalization is "coming in bits and pieces. It is the procedures which actually determine the environment for investment."43
41. Interview with Bombay businessman, Washington, D.C., November 1984. 42. India Today, August 15, 1985, p. 65. 43. Financial Express (New Delhi), October 5, 1985.

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A survey conducted by the Association of Indian Engineering Industry (AIEI) in late 1985 revealed the wide variety of problems in implementation its members were experiencing. The AIEI discovered difficulties with a whole list of policy initiatives including the reendorsementof licenses for MRTP companies, broadbanding,an increase in the threshold level for the small sector and ancillaries, the automatic licensing scheme, the 100% export program, and import/export policies. The survey revealed, for example, that the Department of Company Affairs was simply not acting on applications for "automatic" reendorsement of licenses for MRTP units; local controllers of imports and exports in major port cities refused to act on approved policy changes without direct approval of the Chief Controllers of Imports and Exports in New Delhi; and the Reserve Bank and excise authorities refused to grant appropriateconcessions to newly qualified units in the small-scale and ancillary sectors because appropriate notification had not yet been issued by the Finance Ministry. That the proper notification had already been issued by the Industry Ministry was not considered sufficient grounds for action.44 Inaction and poor coordination have been accompanied by contradictions in the complex web of policies themselves. As the Dagli Commission had noted some years earlier in its review of textile controls, controlsystemis couchedin such legaljargonand is so comEventhe updated feelsthat ... to confusing the layman. The Committee plex as to be somewhat to the lack of clarityas well as the lack of widepublicityin regard the controls evils of the thatexist . .. givesriseto harassment, corruption the attendant and
regulation of economic activity.... The substance of the controls gets lost in

to "advisers."45 the maze of verbiage, all exceptprofessional Under the Indian system, rules are superimposed upon rules, which makes change and innovation extremely difficult. For example, when Citibank in Bombay wanted to introduce automatic teller machines for the convenience of its customers, the effort was blocked by the Reserve Bank on the grounds that such machines would be tantamount to opening a number of new branches and would therefore violate Citibank's license.46 Similarly, while the new principle of broadbanding was designed to grant greater flexibility to producers, companies in the automobile industry found they were blocked from producing new, more complex car radiators because another policy reserved all radiator production to the small-scale

44. Business Standard (Calcutta), October 7, 1985. 45. Report of the Committee on Controls and Subsidies, p. 35.

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and ancillary sector.47 Likewise, while the new electronics policy of March 1985 opened the industry to non-FERA companies with less than 40% foreign shareholding, Peico Electronic and Electrical LTD (formerly Philips India) found its entry into the field blocked by the television policy of 1983. Peico applied for permission to manufacture 100,000 color television sets and 50,000 color television kits, but the Indian Television Manufacturers Association (ITMA), representingindigenous producers, blocked Peico's application on the grounds that companies like Peico were specifically banned from the field under a 1983 government policy.48 Thus, business itself has sought to use the regulatory system to reduce competition. As Rajiv himself has acknowledged, "for every businessman who welcomes a move to liberalize, there is at least one to lobby against it."49 Even the alleged decline in delays and the sharp increase in approvals of industrial licenses and foreign collaboration must be viewed with caution. As the Nanda Committee pleaded back in 1979, "in making our appeal for a 'deadline approach' we hope that the results will be in favor of a positive but not a negative response. We are fully aware that a negative side effect of our proposal may well be a tendency on the part of the Administrative Ministry or any agency to respond in a negative manner."50 In short, measuring the speed of regulatory decisions may itself be complex. One can easily claim adherence to time limits proclaimed by government policy by simply turning down cases that might spoil one's record, approve them knowing they will not be implemented, or use a variety of procedural devices to stop the time clock.51 It is interesting, for example, that a report issued in November 1985 proclaimed that the government had disposed of 1,540 applications for industrial licenses from January to September 1985. Of these 1,540 disposals, 796 (52%) were approved; the remainder were disapproved. In addition, 792 cases were still pending, but it was claimed that most of the pending cases were still within the prescribed time limits for disposal. The rejected applications were turned down on the grounds of adequate existing capacity, improper formulation of the proposal,
47. Business Standard (Calcutta), October 7, 1985. 48. India Today, October 15, 1985, p. 66. 49. Far Eastern Economic Review, January 17, 1985, pp. 50-58. 50. Government of India, Ministry of Industry, Report of the Committee on Industrial Licensing (New Delhi: Ministry of Industry, 1979), pp. 76-77. 51. In theory, the regulatory system is required to operate within prescribed time limits: 90 days for an industrial license, foreign collaboration, and capital goods application; 120 days for composite applications; and 150 days for an application involving MRTP Act clearance. In practice, clearances have taken 2-3 years, and there is a variety of devices used by the bureaucracy to stop the clock. Rajiv has made a major effort to accelerate the clearing process. Kochanek, "The Politics of Regulation," pp. 191-203.

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nonassurance by the state government concerned on the supply of raw materials, location of the project contrary to government policy, or the item was reserved for the small-scale sector.52 Past experience has indicated that some of these categories were easily amenable to an effective lobbying effort or the appropriatedistribution of "rewards." The concept of capacity was highly elastic and adjustable, and the improper formulation of proposals was among the less difficult problems facing the sophisticated lobbyist. Approval levels are also deceptive in India because approval does not mean production. Many of the projects approved will never be implemented. A recent study of the Reserve Bank, for example, found that 43% of all foreign collaboration approved in India from 1977-78 to 1980-81 was stillborn. Similarly, a recent review of industrial licenses sanctioned for backward areas and no-industry districts found that a large number of these projects are never implemented because of the lack of basic infrastructure.53 Other studies have found that large numbers of approved projects never materialized because regulators may attach too many conditions to the approval, the applicant may fail to secure the necessary financing, or the application itself was submitted in an effort to preempt capacity so as to block others from entering the field.54 Even industries that are delicensed are in fact far from free of the regulatory net, and the freedom of the entrepreneur to establish a new production unit is an illusion. As one businessman put it, "What does the Government mean by de-licensing? I still have to go to the Government for approval of my phased manufacturing programme, for clearance of capital goods imports, for the location of my factory, for clearing my collaboration agreement, for clearance by the controller of capital issues if I want to raise money from the public, and submit my proposal to detailed scrutiny by the Directorate-General of Technical Development if I want imports at the lower of the rates that the Government specifies. So what have you changed? Just two things: I don't have to fill in a form with 18 copies, and there is no limit to the number of entrants in any field. . .. You can't undo 20 of 200 knots tying me up and ask me to run."55

52. Financial Express (New Delhi), November 11, 1985. 53. Economic Times (New Delhi), December 24, 1985. India Today, March 15, 1986, pp. 54-55. 54. See Reportof the Study Groupon Industrial Regulations and Procedures(Ramakrishna Committee), Industrial Licensing Policy Inquiry Committee Report, 1969 (Dutt Committee) and R. K. Hazari, Industrial Planning and Licensing Policy Report, 1968. 55. India Today, March 15, 1986, p. 57.

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Problems of implementation present a formidable barrier to liberalization of the Indian economy. Implementation, however, is not the only barrier. The process of alteration or selective deregulation is like a policy process in reverse.56Just as the initiation, creation, and design of regulatory measures give rise to coalitions of supporters and opponents, the same is true for the process of deregulation. The original supporters of the regulatory regimen resist the deregulation, and resistance also develops because of the painful adjustments that are required. Regulation creates major economic distortions and cannot be changed without itself creating considerable disruption. There is even deep concern in government itself that too much liberalization would lead to "social upheaval."57 India does not build factories, it builds "industrial cathedrals." These "industrial cathedrals" are not allowed to close or fail. In India, resistance to Rajiv's policy of liberalization comes from labor, business, the swadeshi (Indian industries) lobby, and the intelligentsia. These forces combine to create formidable resistance to any major transformation of the system. Although organized labor in India represents only 2% of the labor force, traditional trade unions have been closely allied with major political parties in India and have been extremely vocal. However, these unions have recently been challenged by the rise of new, independent, militant leaders who have concentrated more intensely upon the immediate needs of workers, including higher wages and job security. Rajiv's high technology and liberalization policies represent a major threat to both organized and unorganized labor. Indian labor has traditionally resisted computerization and modernization because of their employment implications. Computerization, for example, has been seen as a threat by the highly vocal and strategically placed white-collar workers in the service sectors such as banking and insurance. In the industrial sector, Rajiv's efforts at modernization of the textile industry present enormous threats to employment levels in India's oldest, largest, and most important industry. It is estimated that as many as 100,000 jobs may be lost in the powerloom sector alone as a result of the new policy. Rajiv's new textile policy has already resulted in the mobilization of a diverse coalition of labor and farmers led by Sharad Joshi, a militant farm leader who has joined with Dr. Datta Samant, the militant Bombay union leader. Joshi has dubbed Rajiv's textile policy as anti-farmer, anti-labor, and anti-people.58 He has argued that it will generate massive unemployment both in the factory and on the farm, throwing hundreds of thousands
56. Mitnick, pp. 431-447. 57. The Economic Times (New Delhi), September 29, 1985. 58. India Today, November 15, 1985, pp. 70-71.

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of powerloom and handloom workers out of jobs and depressing cotton prices and production because it will encourage greater use of blended fabrics. There is little doubt that Rajiv's textile policy will prove to be one of the greatest challenges in his attempt to alter the competitive character of the Indian economy. Despite its surface euphoria, even the Indian business community is deeply worried about the implications of liberalization for Indian business. The Indian business community has always favored deregulation and decontrol in theory. In practice, most businessmen have resisted it. Indian business always wants selective liberalization. Thus they will demand, for example, an end to price controls on their products but will insist on price controls for public sector services, raw materials, and imports. Indian business has grown up in a mercantile environment in which regulation has served as a major device for protection. It protected the domestic producers from foreign competition, the small producer from the big, and the private sector from the public sector. Over the past few decades, India has built a substantial industrial sector based on import substitution. However, many of these units are small, noncompetitive, high cost, and technologically obsolete. Many units succeed in making a profit operating at only 40% of capacity because of the closed economy. They have thrived in a society of scarcity and shortages. Any import liberalization is immediately attacked as leading to the dumping of cheaper foreign products.59 Rajiv's policies are a threat to the very existence of many sectors of Indian industry. The machine-building industry, for example, has been thrown into turmoil as newly licensed industries turn to outside suppliers for the latest in high tech equipment. The Indian drug industry, seeing threats to indigenous production, has prevented any change in the 1978 drug policy. Electronics manufacturershave forced alteration of the electronics policy, and even a champion of modernization like Rahul Bajaj of Bajajscooters is opposed to the introduction of new modern Japanese-style two-wheeled vehicles which might make his old Italian model obsolete. In fact, there are some who argue that the only reason Rajiv's liberalization has gone as far as it has is that it has focused largely on those industries that do not have large, established producers. The Tatas and Birlas, it is argued, would never allow foreign entry into their fields.60 One of the most powerful lobbies in India is the swadeshi lobby, a term applied to those who press for indigenous production, self-reliance, and oppose all forms of foreign competition. It is a diverse group of business59. Telegraph(Calcutta), November 2, 1985. 60. Interview, Washington, D.C., January 1986. See also Far Eastern Economic Review, October 17, 1985, pp. 84-87.

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men, intellectuals, politicians, bureaucrats, and ideologues of various kinds. This lobby has attacked Rajiv's liberalization as a threat to Nehru's concept of economic self-reliance and indigenous research and development, and term it an effort to integrate India into the world capitalist system. The swadeshi lobby is hostile to the West's multinational corporations and is especially critical of Rajiv's liberalization of imports, encouragement of foreign high technology, and the entry of foreign multinationals. In addition to stalemating a decision on changes in the 1978 drug policy for the past two years,6' they have successfully reversed a government decision on the use of foreign brand names62 and have mounted strong pressures against the Commerce Ministry to reduce imports of a whole variety of goods.63 Criticism by this lobby has been so intense that Rajiv has had to publicly assert that government has not deviated from Nehru's policies of self-reliance and has argued that liberalization of the import of technology will not throttle indigenous research.64 Others in government have also been required to repeatedly defend the policy.65 In addition to the swadeshi lobby, intellectual resistance to Rajiv's policies take two other forms, both of which reflect a populist overtone. One group of intellectuals is concerned about the impact of Rajiv's policies on poverty. The other group represents the traditional left's concern with socialism and the public sector. Rajiv is vulnerable on both fronts. The poverty argument focuses on the impact of Rajiv's liberalization on India's social structure. It sees Rajiv's policies as neutral on the issue of poverty eradication and fears that these policies will increase inequality in Indian society. Growth alone, it is argued, will not solve India's poverty problem. The intellectual left insists that growth, equity, and self-reliance must be based on the public sector as the prime mover "with public authorities having greater access to national resources and technology in a decentralized environment."66 The intellectual left sees Rajiv's policies favoring the rich, big business, and foreign multinationals. These policies, they argue, will integrate India into the global capitalist system and destroy selfreliance and political independence. Rajiv is still very sensitive to criticism coming from the populist left. He must still look over his shoulder and reiterate his commitment to India's basic development consensus as outlined in the Industrial Policy Resolu61. 62. 63. 64. 65. 66. India Today, October 15, 1984, and June 15, 1985, pp. 64-65. The Economic Times (New Delhi), October 7, 1985, pp. 58-59. Business Standard (Calcutta), November 4, 1985. Financial Express (New Delhi), October 12, 1985. Telegraph (Calcutta), October 11, 1985. Business Standard (Calcutta), October 13, 1985.

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tion of 1956. Thus Rajiv has repeatedly reaffirmedhis commitment to socialism and the public sector. In December 1985, for example, he assured the Rajya Sabha that the government would not deviate from the socialist path. Shortly after his election, he had given similar assurances to his own party. Rajiv has also reiterated on several occasions that the public sector will never be allowed to become secondary to the private sector.67 Problems of implementation and counterpressures are further compounded by a series of constraints and bottlenecks inherent in the Indian economy. The policy of liberalization is based on the assumption that the policy environment has impeded competition, efficiency, and growth, and has been responsible for India's slow rate of industrial development. Critics, however, have pointed to a variety of problems that may be as important or even more important in explaining India's development problems. These include the lack of effective demand, shortages of resources, outdated plants and equipment, poor ancillary support, and weak infrastructure. These problems were recently highlighted in a study by the National Productivity Council's Productivity Board for industrial machinery. This study found that most of the problems of productivity in the machinery industry had little to do with regulatory policies. It found the major stumbling block to productivity to be a lack of effective demand. Some 53% of its respondents cited a lack of demand as the key problem faced by the industry, followed by 34% who focused on problems of raw materials, 25% who cited outdated plant and equipment, 23% who suffered from poor ancillary support, and 11% confronted by lack of machinery availability.68 Similarly, a government review of the shortfalls that occurred in the Sixth Five Year Plan found that the major problems included lack of adequate infrastructure, especially power, labor unrest, insufficient demand, and raw material shortages. The lack of demand was attributed to the slow growth in per capita income during the plan period.69 Rajiv's strategy, however, is based on the assumption that India's new middle class of 100 million represents a large enough and rich enough market to absorb major increases in production. Traditionally, the balance between scarcity and surplus in India has been extremely small and delicate. A slight spurt in growth and an increase in production have tended to tip the balance from one of scarcity and high profits to one of surplus, recession, and losses.
67. ForeignBroadcast Information Service, VIII, April 15, 1985, p. E2. 68. India Today, November 15, 1985, p. 67. 69. Financial Express (New Delhi), November 13, 1985.

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By late 1985 and early 1986 a variety of signs began to appear in India to indicate the possibility of an onset of demand recession in selective industries. Surveys showed a lack of demand for textiles despite good harvests, a textile machinery industry operating at 40% capacity, and a surplus of unsold stocks of tires, trucks, and other products.70 The Federation of Indian Chambers of Commerce and Industry (FICCI) has expressed concern over a growing demand recession in a number of industries.71 A prominent economist has estimated a likely 20% shortfall in output growth in the first year of the Seventh Plan,72and a report by the government's Central Statistical Organization found that the real growth in national income for 1984-85 was onlv 3.5%, one-half what it had been the previous year.73 Lack of effective demand is not the only problem faced by Indian industry. Another major problem is the lack of synchronization in the economy as a whole and the existence of a weak, poorly integrated technological base. Rajiv's computer revolution may be stymied by an inadequate and irregular supply of power and a faulty telecommunications system that cannot link them together. When Indian Airlines, for example, attempted to install its long-debated computer reservation system, the system simply broke down because the telecommunication network was unable to handle it. India's structural bottlenecks are paralleled by a whole series of domestic and international financial and trade constraints. Rajiv's Seventh Five Year Plan suffersfrom a massive resource gap, and there is danger that his import liberalization policy, which is designed to improve productivity, may not be sustainable. The policy will enlarge India's debt service levels as imports may not be offset by increased exports due to uncertain world demand. The resulting foreign exchange gap may not be sustainable. The problem may become compounded, moreover, by constraints on concessional assistance and the limited scope for further import substitution. The result may be a failure to meet desired growth targets and a massive resource and foreign exchange gap.74 A review of the results of the Sixth Plan reveals some basis for these concerns. Although the Sixth Plan was considered an overall success, there was generally poor performance in the two key sectors critical to Rajiv's new policies in the industrial and trade sectors. The Indian econ70. 71. 72. 73. 74. Business Standard (Calcutta), January 9, 1986. Ibid., December 21, 1985. Financial Express (New Delhi), January 26, 1986. Business Standard (New Delhi), January 29, 1986. OverseasHindustan Times (New Delhi), August 24, 1985, p. 13.

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omy during the Sixth Plan was carried along by the agricultural and not the industrial sector. While agriculture grew at the rate of 4.4% per year during the plan period (1980-85), industry grew at a rate of only 3.9%. This low level of growth took place despite an increase of 16% in real investment in fixed assets. Rajiv's Seventh Plan, however, has projected a growth rate for industry of 8.3% per year, more than double its actual performance during the Sixth Plan. Similarly, India's export growth fell far short of its targets. During the Sixth Plan, exports totalled only 330 billion rupees versus a target of 440 billion rupees.75 Given the combined impact of sluggish implementation, interest group resistance, structural bottlenecks, and financial constraints, it is small wonder that observers are divided over their assessment of the long-term impact of Rajiv's policy of liberalization. Moreover, Rajiv has been labeled a pragmatist. Unlike Maggie Thatcher and Ronald Reagan, Rajiv's commitment to liberalization is neither personal nor ideological. It is based on a pragmatic assessment that it will stimulate development and growth. Yet, since it will take a considerable amount of time before one can assess the full impact of Rajiv's policies, there is a deep concern that Rajiv may not have the time, patience, or commitment to wait. Faced by a strong counteroffensiveby opponents of the policy and a claim that liberalization the ology has failed, there is a fear that Rajiv may reverse course and restore the more restricted policies of self-reliance, swadeshi, and socialism.

75. India Today, September 15, 1985, p. 76.