India's Future Depends on Economic Reforms

At the end of the Second World War, radical changes occurred in many of the newly independent nations that once were part of the British Empire (search).

India, for one, opted for a centralized and planned economy (search), drawing upon Marxist (search) ideas. In its attempts to fix the backward nature of its economy and the problems of mass poverty, it created a system fraught with regulations and as bureaucratic as communist Russia.

Things appear to be changing since the election of the Congress Party (search) and key reformer Manmohan Singh (search) as prime minister earlier this year. Already, Singh has held successful peace talks with cross-border rival Pakistan. He has shored up relations with the United States, which soured in 1998 because of India's nuclear tests.

On the economy, Singh's track record is one of attracting foreign investment by opening up markets -- what the new administration will need to do if it wants to tackle the fiscal deficit in India, which totals 4.8 percent of gross-domestic product.

Economic reform is on the horizon, and this change half a world away could have a profound effect in the United States. As more American companies tap into the vast Indian market, India gains significance in the global arena.

Singh should seek to cut bureaucracy and regulation, which hinder both domestic growth and foreign investment. He'll be swimming against the tide of Indian history and that of his own party in doing so, but it's the right thing to do to modernize India and her economy, which traditionally has been protectionist.

Cutting back on restrictions on business growth -- such as the 36.75 percent top rate of corporate tax, the 28.2 percent weighted average tariff and a government that consumes 13.1 percent of GDP -- is crucial if India is to continue to benefit from foreign investment. Such restrictions make it difficult for investors to access markets and hurt interstate commerce.

Right now, if an American company such as Microsoft or IBM wants to do business in India, it first must win approval from the Foreign Investment Promotion Board (search). Singh should make trade simpler by implementing lower tariffs (search) and reducing export controls.

India has to come to terms with the reality that its planned central economy has failed and that much more needs to be done to encourage the ailing private sector, which makes up less than 10 percent of the Indian economy. Currently, the private sector is prohibited from investing in major industries such as energy. Also, the strict industrial licensing regulations and labor market and employment controls prevent private enterprise from flourishing.

It won't be easy with 20 million people on the public payroll and 70 percent of all legitimate work found only in the public sector. Nonetheless, privatization and decentralization are economic realities in the globalization age, and their benefits far outweigh any sense of national pride conveyed through public ownership. Singh will need to press hard for reform, since his coalition government needs the support of left-wing parties to pass legislation on privatization issues.

Rural development and the war on poverty are also important issues for the Congress Party, especially since they contributed to the party's election victory. In addition, the majority of Congress's support base is from the agricultural community, which makes up 60 percent of India's labor force.

With 25 percent of Indians living below the poverty line, the fate of the poor is a real issue that requires direct action and involvement by the federal government. State welfare and education programs proposed by the Singh administration will seek to address this, along with direct international aid such as $100 million India received from billionaire American computer mogul Bill Gates to fight the epidemic spread of AIDS.

Indians have a natural inclination towards socialism, with its emphasis on the collective well-being. Capitalism is seen as impractical in a country numbering over one billion. Yet, free enterprise is essential to economic development and presents a more realistic solution to alleviating poverty. India should encourage entrepreneurial activity. With a targeted growth rate of 7 percent to 8 percent, the new finance minister, P. Chidambaram, seeks to address this.

Fortunately, with its cheap and plentiful labor and ample natural resources, India already is attractive to foreign companies and investors.

Economic growth in India also would benefit America, as increased investment means greater profits for American companies. The U.S. should push for more market access in India, and a fairer export control system.

The result: a radical change that benefits everyone.

J. Singh-Sohal, a British citizen and a student at Brunel University in London, is an intern at  The Heritage Foundation.