Home » CEO Interviews » RAJIV GANDHI DISCOVERS SUPPLY-SIDE ECONOMICS

RAJIV GANDHI DISCOVERS SUPPLY-SIDE ECONOMICS

India’s young, new prime minister has slashed tax rates, cut import duties and eliminated licensing restrictions in 25 industries. It’s an auspicious start toward economic liberalization, but will he see it through?

“He’s a pragmatist,” confides an Indian businessman. He realizes that as India‘s needs are changing, its methods must change also.” Pragmatism is the new buzzword in Indian politics since Rajiv Gandhi came to power following the assassination of his mother Indira last October by three Sikh members of her bodyguard. Lacking a firm political base and facing growing turbulence in the strife-torn Punjab, Gandhi has had to be expedient if only to try to return India to some semblance of normalcy.

Nonetheless, he has taken the country much farther than anyone expected. After years of Draconian taxes and an elephantine bureaucracy that dominates all facets of daily life, he has begun to inject incentives and competition into the system. Although irritated with comparisons to the market-led success of the Pacific Rim economics, some Indians question the Fabian development policies they inherited from the British and a generation of Cambridge University-and London School of Economics-trained bureaucrats. As one Sikh textile manufacturer said, “They just don’t work.” Gone is the paranoiac talk of “self-sufficiency” where everything from needles to nutrients had to be made locally. In the recent economic plan homages to socialism are conspicuously absent.

Liberalization didn’t start with the current prime minister. Indira Gandhi tentatively eased some controls to get some sectors of the economy off dead center. The country remains a planned economy. A businessman cannot use more electricity simply because he has the money to pay for it. One must obtain permits and licenses from a bureaucrat who is in no hurry-particularly if you haven’t, as one Delhi businessman puts it, “sweetened his tea.” Confiscatory taxes and red tape have driven 50 to 60 percent of the country’s economy underground. To get at that “undeclared” wealth, Gandhi has trimmed corporate and individual taxes, loosened regulations and decentralized the licensing power in the office of the chief controller of imports and exports.

Along with his new economic program, India watchers are taking considerable interest in Gandhi’s foreign policy. The Soviet Union wants to be reassured that the pro-Soviet policies of Indira will be continued. The Reagan administration feels that with Indira and many of her advisers gone, the time is ripe to patch up old differences. Henry Kissinger, Under Secretary of Defense Fred Iklê, Air Force Secretary Verne Orr, and Commerce Secretary Malcolm Baldrige have all made calls on the “new men” in Delhi.

It would be naive to believe that India will become lukewarm toward the Soviet Union. In interviews with Soviet television, as well as with Chief Executive, Gandhi affirmed India‘s economic and cultural ties with the Kremlin. A country’s foreign policy is dictated more by its interests than by its rulers, and for the present India regards with suspicion the aid that the U.S . gives to Pakistan.

It’s not difficult to see why Rajiv Gandhi remains popular at home. At 40, the former Indian Airlines pilot represents a rising class of confident Indians. As the third in the Nehru-Gandhi dynasty, he has links with the past and yet is considered his own man. During a 50-minute talk held in his offices at Parliament House with CE managing editor J. P. Donlon, he displayed great warmth and a sense of humor. Excepts follow.

In a recent interview with a Calcutta daily you said the public sector is the basis for India‘s development and will never be second to the private sector. How does this fit with your invitation to foreign investors to develop India‘s high technology? Where does the private sector fit into your plans?

There is no contradiction. You must see India as India not as a country which started its development 37 years ago. Thirty-seven years ago there was absolutely nothing here. We made textiles but we couldn’t manufacture sewing needles, that was the level of technology. Nor did we have technologically trained manpower or any management capability. Because the private sector had little financial strength it was up to the government to develop all this. We used the public sector to develop regions where there was no infrastructure and where there were also tremendous problems. The private sector wouldn’t go into these areas; they would lose money.

It’s true that the price we pay for forcing the public sector into these regions is that it becomes uneconomical, but the return to us is the development and opening up of an area to industry. If you look at it from this perspective, the public sector shows up in a different light.

But just how far will you allow free-market forces to revitalize India‘s economy?

We have to watch what we have done. The biggest problem we face is our resource restraints. Tied to this is our underground or black economy. There are all sorts of estimates, some enormous, others not so bad, about how large it is. The fact is that a large underground economy is functioning and we’ve tried everything-raising taxes, at one stage we were at marginal rates of 106 or 107 percent-to curb it. It didn’t work. We just didn’t get enough money. After increasing taxes a little bit and reducing them a little bit, the net amounts we actually picked up were meaningless.

We’ve now taken measures which will attack both these problems. The first is to try to get undeclared money declared. To do this we’ve lowered income taxes to a maximum marginal rate of 50 percent in order to induce people to be honest. Second, we want to see that money is invested in the right direction. Our finance minister is introducing a wealth tax-exempt certificate or bond paying 13.5 percent interest. So if you invest in energy and communications-anywhere in these industries, from manufacturing of components to companies that generate and deliver power-the earnings will not count toward the wealth tax. This will bring money into energy where we are in very serious trouble-we’re 25 percent short of generation.

Would you consider further reduction of taxes?

We’ll have to watch and see whether we get a return on this-I don’t mean in tax collection, but a return in productivity, a return in increased activity, a more buoyant economy.

Do you have any plans to denationalize any of the 200 or so state-supported industries that presently have claims on the treasury?

It’s very difficult to say. Let’s put it this way: it wouldn’t work; nobody would buy them! There are some areas where we certainly should not be as a government. We’ve gotten into this business of taking over sick industries and not letting them die a natural death because it has been politically necessary. In a developing country with high rates of unemployment it’s very difficult to put people out of work. We don’t even have a dole in the proper sense of the word. So in a way this is our dole program where you run a state-supported business at a loss and keep people employed. But I wonder how long we can keep doing this. We’re making tomato sauce; we’re making soft drinks! It would be all right if we were making whacking great profits because it would be another way of earning money to plow back into development, but we’re not making such large profits.

Recently we’ve opened up such areas as energy and communications to the Indian private sector and some defense industries, too. But we can’t allow the private C sector at this stage of our development to hold us to ransom in vital areas. In many non-vital areas the private sector doesn’t yet have the capability or the resources to do it. So we’ve got to do it. Since 1950 the share of India‘s economy representing the private sector has been gaining. As it gains experience and strength we give it more leeway, more freedom of action. I’m sure this will continue.

Most businessmen in India say something should be done about the level of corruption and the difficulty of getting things done through the country’s 14million-person bureaucracy. How will you overcome this problem?

The bureaucracy is a much maligned-well, I shouldn’t say-monster. It has its problems and we’re fully aware of them. But you must see the plus side. Our system has been a true functioning democracy for almost 40 years of independence. It has survived a number of major traumas. In 1947 Gandhiji was killed; in 1971, we had 10 million refugees-you remember what happened to the U.S. with only 250,000-we had 10 million for a year. In 1977 we had a major change of government with the Congress Party leaving and another government coming in for the first time. In 1980, we had another change of government and in 1984 our prime minister was shot down-throwing the country into turbulence. However, democracy survived and much of the credit-not all of it-must go to the bureaucracy because of its steadying factor.

Corruption is a very major problem and we’ve taken quite a few steps to curb it. Most of our efforts have not been visible but they will start working. For example, if the income-tax authorities raided a premise and discovered a large amount of undeclared wealth, the old law held that the owner got 15 days to declare it, pay the tax and he was free. We said this is ridiculous. It’s frustrating for the income-tax boys because after doing this they get a bad name-they get called up and are told there’s no case. Corruption can be looked at from two perspectives. One is the very large amounts of money at the top. I can honestly say there are very few people at this level who are involved in this sort of thing. We know who they are and we’ll sort that out fairly soon. The real problem is the massive corruption at the bottom where there are millions of people spread out through the villages, which makes it harder to control. There will be a system of checking for wealth disproportionate to income on the one hand, and a change in rules and regulations on the other to give corruption less of a chance to take place.

Many U.S. and European firms are reluctant to invest in areas where roads and infrastructure are poor and the reliability of energy is dubious. How are you overcoming this?

We’re fully aware of these problems and we’re trying to work them out in our seventh [economic] plan. There is no use in telling you that by tomorrow our energy problems will be solved. They will not. We’re diverting our resources toward energy and communications. We’re looking into giving captive power plants for particular industrial zones in order to cope with power shortages. Concerning communications-we’re concentrating on the data side which seems a lot more cost-effective than telephone lines and it would off-load the telephone circuits for normal use. It’s going to take two to three years minimum to get things going. On the other hand, India offers many advantages for foreign investors. It has political stability and its policies do not change dramatically. We don’t do turnabouts and suddenly become vicious in a particular direction. We also have cheap manpower and an intelligent labor force. I worked in factories in England during my college days and I’ve seen our people here. Our people think much more; they get going much quicker. We’ve also been good in repaying our loans. We only undertake small loans we are able to pay back. We haven’t been caught in that development problem. Some 90 to 93 percent of our projects are internally financed.

Such U.S. firms as Coca-Cola and IBM have left India rather than accept regulations calling for them to sell majority ownership to Indians. Will you change your foreign-ownership policy?

I don’t think we need to. The rule is not that you have to dilute, the law is that if you don’t dilute you get certain restrictions-well, you get more freedom if you are 40 percent or less foreign-owned. You can have a 100 percent foreign-owned company if the product is exported. We’ve got many industries coming in, many Japanese and European firms, so there is no problem. It’s only if you want to compete with our industries that we put up all sorts of cogs. But a lot of rules and taxes have changed since 1977 or 1978, when Coca-Cola and IBM left. Although the 40 percent rule hasn’t changed, it’s a different picture today. And honestly-IBM, yes, that’s a key area where their presence would benefit us, but Coca-Cola, do we really need it?

But certainly, with the liberalization you’re bringing to India‘s economy, more competition from outside sources will put pressure on domestic firms. Will they be able to compete?

Well, they must. You know, our biggest problem in relaxing these rules and regulations came not from politicians or the public but from the firms themselves, especially the bigger firms. They had a vested interest in continuing the system. They had a captive market-one of the biggest markets in the world. The capacity of this market is much more than is visible. For example, during three or four months in 1982 we made it duty-free to import color television sets and I was told that television sets from Tokyo to San Francisco just weren’t available. Everybody was buying them up. We’ve opened up the TV industry here and there is a tremendous demand for color TV tubes. We just can’t buy them. We have to wait two years before we can get what we want.

I was in a village during an election tour. It was a small, normal Indian village, mud houses, very utilitarian-looking. There, in the middle of nowhere, I see this huge sign: “Video Library.” When we wanted to set up 140 TV transmitters in a year nobody in the world could supply them. We had to get three or four Indian companies to manufacture them. That’s the sort of capability we’ve got.

No doubt you’ve been preoccupied with internal problems at the moment, but does the presence of the Soviet army in Afghanistan, now in its sixth year, alarm you?

The situation is not good. I would like the Soviets to go back. We don’t like intervention in other countries, but there are complications. The U.S. is sending a large number of weapons to the Muhjarhadin fighting from Pakistan and they are more or less fighting a war on that border. I cannot see the Soviets leaving while this is going on and it disturbs us more because we see it escalating. As arms supplies to the Muhjarhadin escalate the Soviets and the Afghans will react. We don’t like this so close to our borders.

Are you saying the Soviet army would quit Afghanistan if arms shipments directed to the Afghan rebels ceased?

Let me put it another way. They will not leave while the arms shipments are going on. I cannot see them leaving. I’ve not talked to the Soviet leaders, but, understanding the situation, I don’t believe they will leave as long as the shipments are going on.

And if they cease do you think they would leave?

They may.

What evidence is there in Soviet history to show that this would take place?

I don’t know whether we need to look-well, you can look at history, but you must also look at the picture as it exists today. I would be optimistic. This is really something between the Afghan government and the Soviet Union because the Afghan government invited them in and the Afghans would have to feel secure before they would let them go back. I’m sure the Soviet Union sees its southern border not very differently from how the U.S. sees Central America. You feel vulnerable; they feel vulnerable.

Doesn’t the Soviet army’s presence in Afghanistan predate the shipment of arms to Afghan rebels?

Yes, they did predate the arms shipments, but one of the factors that might have shifted the thinking was the development of a rapid deployment force-the philosophy of quick intervention.

But no outside force other than the Soviets have intervened in the area. There’s no insurgent force other than the Afghans themselves.

No, not at the moment. Just as there’s no one in Nicaragua but the Nicaraguans.

And a few Cubans.

During Mrs. Gandhi’s administration U.S.-India relations were often very stormy. What do you want them to be under yours?

We want understanding. They’ve been stormy and fierce but at the same time our trade has increased to its highest level. In fact, I was looking at a graph of Indo-U.S. trade the other day. Whenever the political relationship has been most turbulent those are the years our trade has increased the most. Whenever the political relationship has been very friendly, trade drops.

How do you account for that?

I don’t know, but our real problem with the U.S. is its policy toward Pakistan. Pakistan‘s internal policy or your bilateral relations with it are none of our business. But there are concerns which affect us as well as the whole subcontinent. We are convinced that they are making a bomb and that the U.S. is doing nothing to stop them. I’m deliberately putting that in the negative. The U.S. has given them-the only country-exemption from the Symington Amendment. Recently one of their people was trying to take out 50 krytrons-triggers for nuclear devices…

But he was apprehended.

But he was released and was not charged. He was allowed to go home and that charge was changed. This worries us. If they have a bomb, it’ll be too late.

Don’t India and the U.S. have a mutual interest in Pakistan‘s own security?

We’re in touch with Pakistan. We’re trying very hard to improve relations.

And they have offered to open up their nuclear program for India‘s inspection.

Not really; there’s more rhetoric than actual progress on that, but we’re looking forward to a much better relationship. What President Zia says and what actually happens isn’t very consistent.

What would you like Reagan to do?

He must take some steps. It’s absolutely inexcusable to allow another country to become a nuclear power. When we know they are developing it with European and U.S. technology, it’s inexcusable.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.