Protests Over India's Gay Ruling

India's election

India's election

Congress comes back

India’s ruling party wins an unexpectedly thumping victory

REVERSING decades of decline, the Congress party has won India’s month-long general election by a bigger margin than its most optimistic followers had dared dream of. As results were counted on Saturday May 16th it looked likely to win around 200 of 543 available seats, which would represent the biggest win by any party for 18 years.

Under the prime ministership of Manmohan Singh, Congress will return to power at the helm of a simpler and, it is expected, more stable coalition than it has presided over for the past five years. Its United Progressive Alliance was projected to win around 260 seats. For additinal support, Congress will be able to choose from an eager host of independents and small regional parties, including several recently jettisoned allies.

India’s Communist parties, which provided support and endless headaches to the outgoing government for most of its tenure, will not be among them. The leftists were projected to do unprecedentedly badly, winning around 24 seats—down from their 2004 tally of 62. A new Congress ally in West Bengal, the Trinamul Congress, is the main beneficiary. It was set to win 20 of 42 seats in West Bengal, a state the Communists have ruled for three decades.

Confounding most predictions, another Congress ally, the Dravida Munnetra Kazhagam party, has clung on to win around half of 39 seats in Tamil Nadu, a state it swept in 2004. Yet it was Congress’s performance that was most remarkable. In the absence of any obvious national issue, or enthusiasm for Mr Singh and his patron, the party’s leader, Sonia Gandhi, it trounced its main rival, the Bharatiya Janata Party (BJP), which looked likely to win around 120 seats. In Rajasthan, which the Hindu nationalists swept in 2004, Congress was expected to win 21 of a possible 25 seats. It was also set to win ten seats in Gujarat, which is known for Hindu-Muslim violence and was considered solidly for the BJP.

Perhaps most significantly, Congress may have more than doubled its former account in Uttar Pradesh (UP), with 21 of 80 seats. That would probably make it the second-biggest party in India’s most populous state, behind the Samajwadi party, a low-caste Hindu outfit and sometime Congress ally, which was expected to win 23 seats. The Bahujan Samaj Party (BSP), which is dedicated to dalits (former “untouchables”) and rules UP, looked set to win 20 seats—half the tally its ambitious leader, Mayawati, had counted on.

At first glance, this looked to vindicate Congress’s decision to contest solo in UP, a giant state it once dominated and has long talked of recapturing. Congress’s decision to stand alone in Bihar, where it looked set to win only two out of 40 seats, was less fruitful—though given the collapse of its erstwhile ally there, the Rashtriya Janata Dal party, from 22 seats in 2004 to perhaps three, it may not have been costly.

Both decisions were attributed to Rahul Gandhi, Mrs Gandhi’s 38-year-old son. His father, Rajiv Gandhi, grandmother, Indira Gandhi, and great-grandfather, Jawaharlal Nehru, were all prime ministers of India. Mr Singh, a 76-year-old economist, is set to be the first Indian prime minister since Nehru to return to the office after serving a five-year term. But many expect that Mr Gandhi, who was re-elected to his safe seat in UP, will take over the job within a year or two.

Appearing alongside Mrs Gandhi on Saturday, Mr Singh, who has recently undergone heart-bypass surgery and campaigned little during the election, said he hoped Mr Gandhi, who entered politics in 2004, would agree to join his next cabinet. Commenting on her party’s victory, Mrs Gandhi, the enigmatic Italian-born widow of Rajiv, said: “Eventually the people of India know what’s good for them and they always make the right choice.”

That an unexpected multitude of the 714m voters registered for this election plumped for Congress is undeniable. Early figures suggest Congress increased its vote-share from 26.7% in 2004 to around 29%. And its leaders can congratulate themselves on this. Ruling in a coalition for the first time, Congress has delivered steadier government than many expected. It can also lay claim to unprecedented economic growth for its first four years in power—even if this was largely founded on economic reforms introduced by its predecessors and unusually clement global economic conditions.

Congress also seems to have benefitted from voters’ rising distaste for its rivals. At a time of relative calm between Hindus and Muslims, the BJP used its Hindu-supremacist rhetoric sparingly, and struggled for a convincing alternative. It also seems to have been worse affected than Congress by the traditional anti-incumbency urge of Indian voters, having until recently run state-level governments in several of its northern strongholds, including Rajasthan.

Excited by their success, some in Congress detect a deeper trend—a shrinkage in the appeal of regional parties, such as the BSP, whose rise has constituted the main trend in Indian politics for two decades. That would be good, giving hope for less chaotic and corrupt central governments than Indians are sadly accustomed too. Alas, Congress’s small success in UP is too little evidence for this claim. But Indians can at least expect their new government to be less fractious than its predecessor. And considering the remarkably messy coalition that might have been, if the vote had been as divided as predicted, that is a major blessing.

India's Faulty Exceptionalism

India's Prime Minister has been warning Western nations against protectionism, but he should also direct that advice to his own countrymen

Shikha Dalmia

So far India seems to be weathering the global economic meltdown better than almost any other country. But this blessing might turn into a curse if it makes India skittish about further opening its economy, especially to foreign investment. If the agenda and rhetoric of the main political parties this election season is any indication, that's a very real possibility.

Unlike in the past when the Indian economy contracted pneumonia every time the global economy sneezed, this time the exact opposite seems to be happening: In the final quarter of last year, the U.S. economy shrank by an annualized rate of 6.2% and the Japanese economy by 12.7%. By contrast, India says its economy grew by 5.3% in the same period. (There is a fierce debate among Indian economists about the reliability of government data, but, with some notable exceptions, there is widespread agreement that the country was among the top performers last year.) Next year, India's economy is expected to grow between 5% and 7%. By contrast, the Organization for Economic Cooperation and Development estimates that the combined gross domestic product of its member developed economies will contract by 4.2% in 2009.

But in the face of all this good news, the emerging wisdom among India's political parties is not that its previous round of liberalization worked and now the country needs to move post-haste toward the next round. Rather, they are suggesting that India's relatively strong economic performance shows that it has struck the optimal balance—open enough to benefit from global upswings and closed enough to avoid global contagions. "This financial crisis might well bring out India's latent but powerful dirigiste impulses," warns Raghuram Rajan, an economic advisor to Prime Minister Manmohan Singh and a professor at the University of Chicago.

India's export sector is small, thanks in part to the country's failure to liberalize its archaic, union-friendly labor laws that have diminished manufacturing productivity. But politicians are now hinting that perhaps underdeveloped exports are not such a bad thing after all, as this has made India less vulnerable than other Southeast Asian economies to plummeting global demand. India also does not rely on foreign investments as much as many Eastern European countries do, which has allowed it to avoid the capital flight those countries are now experiencing.

Indeed, Sonia Gandhi, the leader of the ruling United Progressive Alliance coalition, has been crediting India's ability to withstand the global crisis to her mother-in-law, Indira Gandhi's, "much reviled" nationalization of the banks 40 years ago. Although the ban on private banks has been lifted, roughly 75% of industry assets remain in government hands with tight restrictions on foreign participation and ownership. "Public sector financial institutions have given our economy the stability and resilience we are now witnessing in the face of the economic slowdown," she says. Even more ominous than her remarks—which have been widely lampooned in the press as both politically and economically ignorant—is that Home Minister P. Chidambaram, a key architect of India's liberalization and champion of banking reforms, has been echoing them.

Not to be outdone, L.K. Advani, the octogenarian leader of the opposition Bharatiya Janata Party who is vying to become prime minister, has dusted off an old speech and is once again touting swadeshi, or economic nationalism, as the way forward for India. The current financial crisis, he claims, demonstrates that "unbridled capitalism" is no better a model for India than Soviet communism and he wants the government to maintain aggressive restrictions on the financial sector.

This is a dangerous line of thinking that ignores the huge opportunity cost of financial protectionism, especially for India's most economically vulnerable segments in rural areas.

India has made giant strides in opening its economy since 2002 when the U.S. Department of Commerce rated it as "one of the most closed in the world." It has cut top tariff rates on industrial goods from over 100% before liberalization to 10% now. It has also simplified its byzantine licensing requirements for capital imports. But when it comes to foreign investments, its reforms have been incremental and ad hoc—rather than dramatic and stable.

Although foreign direct investment increased last year, the government severely restricts this investment in allegedly politically sensitive areas such as retail trading, railways and real estate. What's more, foreign companies are allowed to participate in construction projects only if they agree to accept payment in nonconvertible rupees—an obvious dealbreaker. Nor can foreign firms that don't have local collaboration participate in most government contracts—akin to the much-derided "Buy American" provision in America's recent stimulus bill which bars the use of foreign steel and iron in stimulus-funded infrastructure projects. Meanwhile, although 100% foreign ownership of companies in "nonpriority" sectors is allowed in theory, regulatory hurdles make this virtually impossible in practice, according to U.S. Department of Commerce.

Contrary to conventional wisdom, the main victims of such restrictionism are not just businesses and consumers in cities—but the poor in rural India as well.

Indeed, the biggest impediments to the modernization of India's villages are the country's abysmal roads, electricity, and sanitation. However, without a sizeable influx of foreign investment—a huge challenge at any time but especially now when major international banks are staring at red balance sheets—it will be very hard to provide adequate infrastructure.

The Indian government's own estimates show that the country needs to invest anywhere from $300 billion to $500 billion over the next four or five years toward infrastructure enhancements. But the government doesn't have this money given that its total national budget deficit—central and state—is well over 11% of GDP—double that of last year. Nor can the government count on India's high gross savings rate—37.7% of GDP this past fiscal year—to finance such projects. India can't mobilize these savings for long-term projects, as the Economist recently noted, because Indians prefer to put them in physical assets such as homes.

Infrastructure is not the only area where rural India could use foreign help. It also lacks access to basic financial services. The vast majority of villagers don't even have bank accounts, let alone instruments to insure against low crop yields due to bad weather. Nearly three-quarters of farm households have no access to formal sources of credit, leaving them extremely vulnerable to exploitative moneylenders. Their only other option is government banks that—notwithstanding Ms. Gandhi's lavish praise—primarily serve people with either connections or collateral, neither of which poor villagers have.

Making better financial services available to them will require, first and foremost, eliminating mandates that force private banks—whether Indian or foreign—to offer "priority lending" to favored constituencies at sweet rates. It will also require removing the barriers to entry that foreign banks face, such as obtaining government approval to acquire more than a 5% stake in a local bank and restrictions on opening new branches.

India is on the cusp of a major transformation that could make the country's crushing poverty a thing of the past. However this will require a renewed commitment to liberalization. India's parties have a long tradition of dumping their campaign rhetoric as soon as they get elected. This time they should certainly honor that tradition—and throw open India's doors to foreign investment and globalization.

Shikha Dalmia is a senior analyst at Reason Foundation. This article originally appeared in The Wall Street Journal Asia.

India's Faulty Exceptionalism

Some leaders think protectionism has saved India from the global slowdown. But the country really needs more openness to trade.

SHIKHA DALMIA

From today's Wall Street Journal Asia.

So far India seems to be weathering the global economic meltdown better than almost any other country. But this blessing might turn into a curse if it makes India skittish about further opening its economy, especially to foreign investment. If the agenda and rhetoric of the main political parties this election season is any indication, that's a very real possibility.

David Klein

Unlike in the past when the Indian economy contracted pneumonia every time the global economy sneezed, this time the exact opposite seems to be happening: In the final quarter of last year, the U.S. economy shrank by an annualized rate of 6.2% and the Japanese economy by 12.7%. By contrast, India says its economy grew by 5.3% in the same period. (There is a fierce debate among Indian economists about the reliability of government data, but, with some notable exceptions, there is widespread agreement that the country was among the top performers last year.) Next year, India's economy is expected to grow between 5% and 7%. By contrast, the Organization for Economic Cooperation and Development estimates that the combined gross domestic product of its member developed economies will contract by 4.2% in 2009.

But in the face of all this good news, the emerging wisdom among India's political parties is not that its previous round of liberalization worked and now the country needs to move post-haste toward the next round. Rather, they are suggesting that India's relatively strong economic performance shows that it has struck the optimal balance -- open enough to benefit from global upswings and closed enough to avoid global contagions. "This financial crisis might well bring out India's latent but powerful dirigiste impulses," warns Raghuram Rajan, an economic advisor to Prime Minister Manmohan Singh and a professor at the University of Chicago.

India's export sector is small, thanks in part to the country's failure to liberalize its archaic, union-friendly labor laws that have diminished manufacturing productivity. But politicians are now hinting that perhaps underdeveloped exports are not such a bad thing after all, as this has made India less vulnerable than other Southeast Asian economies to plummeting global demand. India also does not rely on foreign investments as much as many Eastern European countries do, which has allowed it to avoid the capital flight those countries are now experiencing.

Indeed, Sonia Gandhi, the leader of the ruling United Progressive Alliance coalition, has been crediting India's ability to withstand the global crisis to her mother-in-law, Indira Gandhi's, "much reviled" nationalization of the banks 40 years ago. Although the ban on private banks has been lifted, roughly 75% of industry assets remain in government hands with tight restrictions on foreign participation and ownership. "Public sector financial institutions have given our economy the stability and resilience we are now witnessing in the face of the economic slowdown," she says. Even more ominous than her remarks -- which have been widely lampooned in the press as both politically and economically ignorant -- is that Home Minister P. Chidambaram, a key architect of India's liberalization and champion of banking reforms, has been echoing them.

Not to be outdone, L.K. Advani, the octogenarian leader of the opposition Bharatiya Janata Party who is vying to become prime minister, has dusted off an old speech and is once again touting swadeshi, or economic nationalism, as the way forward for India. The current financial crisis, he claims, demonstrates that "unbridled capitalism" is no better a model for India than Soviet communism and he wants the government to maintain aggressive restrictions on the financial sector.

This is a dangerous line of thinking that ignores the huge opportunity cost of financial protectionism, especially for India's most economically vulnerable segments in rural areas.

India has made giant strides in opening its economy since 2002 when the U.S. Department of Commerce rated it as "one of the most closed in the world." It has cut top tariff rates on industrial goods from over 100% before liberalization to 10% now. It has also simplified its byzantine licensing requirements for capital imports. But when it comes to foreign investments, its reforms have been incremental and ad hoc -- rather than dramatic and stable.

Although foreign direct investment increased last year, the government severely restricts this investment in allegedly politically sensitive areas such as retail trading, railways and real estate. What's more, foreign companies are allowed to participate in construction projects only if they agree to accept payment in nonconvertible rupees -- an obvious dealbreaker. Nor can foreign firms that don't have local collaboration participate in most government contracts -- akin to the much-derided "Buy American" provision in America's recent stimulus bill which bars the use of foreign steel and iron in stimulus-funded infrastructure projects. Meanwhile, although 100% foreign ownership of companies in "nonpriority" sectors is allowed in theory, regulatory hurdles make this virtually impossible in practice, according to U.S. Department of Commerce.

Contrary to conventional wisdom, the main victims of such restrictionism are not just businesses and consumers in cities -- but the poor in rural India as well.

Indeed, the biggest impediments to the modernization of India's villages are the country's abysmal roads, electricity and sanitation. However, without a sizeable influx of foreign investment -- a huge challenge at any time but especially now when major international banks are staring at red balance sheets -- it will be very hard to provide adequate infrastructure.

The Indian government's own estimates show that the country needs to invest anywhere from $300 billion to $500 billion over the next four or five years toward infrastructure enhancements. But the government doesn't have this money given that its total national budget deficit -- central and state -- is well over 11% of GDP -- double that of last year. Nor can the government count on India's high gross savings rate -- 37.7% of GDP this past fiscal year -- to finance such projects. India can't mobilize these savings for long-term projects, as the Economist recently noted, because Indians prefer to put them in physical assets such as homes.

Infrastructure is not the only area where rural India could use foreign help. It also lacks access to basic financial services. The vast majority of villagers don't even have bank accounts, let alone instruments to insure against low crop yields due to bad weather. Nearly three-quarters of farm households have no access to formal sources of credit, leaving them extremely vulnerable to exploitative moneylenders. Their only other option is government banks that -- notwithstanding Ms. Gandhi's lavish praise -- primarily serve people with either connections or collateral, neither of which poor villagers have.

Making better financial services available to them will require, first and foremost, eliminating mandates that force private banks -- whether Indian or foreign -- to offer "priority lending" to favored constituencies at sweet rates. It will also require removing the barriers to entry that foreign banks face, such as obtaining government approval to acquire more than a 5% stake in a local bank and restrictions on opening new branches.

India is on the cusp of a major transformation that could make the country's crushing poverty a thing of the past. However this will require a renewed commitment to liberalization. India's parties have a long tradition of dumping their campaign rhetoric as soon as they get elected. This time they should certainly honor that tradition -- and throw open India's doors to foreign investment and globalization.

Ms. Dalmia is a senior analyst at Reason Foundation.