India's Fine Balance

THE POST-9/11 AGENDA

When September 11 came, India responded rapidly and decisively. On learning of the terrorist attacks on the United States, Prime Minister Atal Behari Vajpayee convened his key advisers and they quickly decided that India would offer its full support for the U.S. war on terrorism.

Their decision was driven in part by India's own problems with terrorism. For a decade, Pakistan's Inter-Services Intelligence Directorate (ISI) had been orchestrating a nasty proxy war against India in Kashmir. Although the insurgency there was rooted in Kashmiri opposition to Indian rule, the ISI helped militant groups train, equip, and move jihadis, or "freedom fighters," across the Line of Control, which separates Indian- and Pakistani-held Kashmir. In joining with Washington, New Delhi hoped to transform this latest and bloodiest chapter of 50 years of Indo-Pakistani conflict into part of the global war against terrorism -- with Pakistan's ISI cast in the role of al Qaeda and India as the victim.

Seizing an opportunity to outmaneuver Pakistan while improving India's relationship with the United States, however, is not the only item on Vajpayee's post-9/11 agenda. He and his government must also handle domestic political crises and deadly communal violence while recharging India's faltering economy. Failure to balance these various challenges could risk the government's electoral mandate and slow India's rise to great-power status.

MAKING UP

New Delhi's prompt support for the war on terrorism marked a further step in the rapprochement with Washington that had begun in the final years of Bill Clinton's presidency. For most of the last 50 years, the world's two largest democracies have been far from friendly. Ties between them had plummeted only recently, when the United States imposed sanctions after India conducted nuclear tests in May 1998. Nine rounds of talks between Deputy Secretary of State Strobe Talbott and Foreign Minister Jaswant Singh soon followed, helping to clear the air. The real turning point, however, came in mid-1999 when Clinton forcefully intervened to get Pakistan to withdraw the forces it had sent across the Line of Control in Kashmir near the town of Kargil. India had assumed that the United States would reflexively support Pakistan and was thus much impressed by the president's action. In March 2000, Clinton followed up with a highly successful five-day trip to India and then went on to a perfunctory five-hour stopover in Pakistan. And in September 2000, Vajpayee had a positive return visit to the United States.

When George W. Bush took office in January 2001, he soon revealed his interest in continuing, and indeed intensifying, the rapprochement, and the Indians eagerly reciprocated. In April 2001, Bush "dropped by" Singh's meeting with National Security Adviser Condoleezza Rice, leading to a cordial 40-minute talk in the Oval Office. When Bush unveiled his controversial nuclear missile defense proposals the next month, the Vajpayee government responded far more positively than did most U.S. allies.

What explains the newfound warmth between these formerly estranged democracies? On the Indian side, Vajpayee's Bharatiya Janata Party (BJP), which dominates the ruling coalition, is strongly nationalistic but does not share the visceral anti-U.S. feelings that flourished in India during the Cold War. Vajpayee and his advisers see better relations with the United States as being in India's national interest. Although the prime minister's portrait of the two countries as "natural allies" is perhaps overdrawn, a growing consensus in New Delhi believes that improved ties with the United States will help India attract foreign investment, assume a greater global role, and ensure that U.S. policies do not jeopardize Indian interests, especially with regard to Pakistan.

On the U.S. side, Bush has been impressed that India, despite its vast population, high level of poverty, and enormous social diversity, genuinely shares democratic values with the United States. His advisers regard India as an emerging great power and hence a strategic partner for the United States in Asia. Indeed, a closer U.S.-India relationship would be useful should things go wrong with China. Traditionally, Washington's links with Islamabad have been an obstacle to friendly ties with New Delhi, but the Bush administration has now decided not to balance its relations with the two rivals; instead, it will allow relations to run on their own separate tracks.

The end of the Cold War has also eased U.S.-India relations. India's friendly ties and large-scale military purchases from Russia no longer elicit American concerns the way they used to. From the Indian perspective, the rupture of the U.S.-Pakistan security relationship in 1990 -- following the imposition of U.S. sanctions in response to Pakistan's covert nuclear program -- removed the principal barrier to improved ties with the United States. Ironically, even India's 1998 nuclear tests ultimately had a positive effect: by rendering irrelevant the issue of stopping such tests, they lanced the boil of nonproliferation that previously infected relations. And the Bush administration's lack of emphasis on the nuclear issue helped smooth things over even more. In addition to these security developments, Indian economic reforms in 1991 boosted U.S. business interest in the country. And the economically flourishing Indian-American community -- 1.7 million strong -- has also become a force for better relations. In one sign of the community's political muscle, some 130 members of Congress from both parties have now joined the India caucus in the House of Representatives.

BACK SCRATCHING

The Bush administration's capable ambassador to India, Robert Blackwill, says that the war on terrorism has "transformed" U.S.-India relations. Although the claim may be overstated, ties between Washington and New Delhi since September 11 have become closer than at any time since President John F. Kennedy came to India's aid during its 1962 border war with China. The war on terrorism has greatly strengthened political dialogue between the United States and India and enhanced cooperation on sensitive issues such as Afghanistan and Pakistan. Vajpayee and his top lieutenants have all visited Washington. Secretary of State Colin Powell has twice been to Delhi, which has also hosted Secretary of Defense Donald Rumsfeld, Chairman of the Joint Chiefs of Staff General Richard Myers, and other top U.S. officials and military officers.

The "transformation" has been most visible in security relations, where Washington and New Delhi have had few dealings for nearly four decades. This change became possible when the United States lifted nuclear sanctions in the wake of September 11. With less publicity but perhaps equal significance, it also eased export controls on so-called dual-use technology, which can serve both civilian and military purposes. Nuclear nonproliferation supporters fought a stiff rear-guard action to limit the scope of this loosening but lost out to those in the Bush administration who wanted a broader security relationship with India.

The two governments have for the first time in many years started discussing a variety of possible arms sales from the United States to India -- including P-3 naval surveillance aircraft, sophisticated counterbattery radars, and General Electric engines for India's Light Combat Aircraft, a fighter plane that has been under development for more than a decade. The United States has in addition given the green light for Israel to include U.S. technology in the radar system it proposes to install in Russian-made planes to provide India with air surveillance and early warning capabilities. The U.S. and Indian armies, navies, and air forces have also moved rapidly since December 2001 to agree on programs for joint exercises, improved technical coordination, and expanded training. Not surprisingly, in view of parallel U.S. and Indian interests in keeping Indian Ocean sea lanes open for the flow of oil, cooperation between the navies is proceeding the fastest.

One noteworthy feature of the improvement in relations has been a conscious effort to avoid diplomatic pinpricks. India thus chose not to publicly criticize President Bush for naming Iran as part of the "axis of evil" despite close Indo-Iranian ties; instead, it privately conveyed its doubts about the wisdom of Bush's statement. Similarly, New Delhi focused on the positive when publicly reacting to the Bush administration's February 2002 climate-change proposals -- even though India strongly endorses the Kyoto Protocol, which the United States rejects. For its part, Washington has been similarly careful and reacted in a subdued manner when New Delhi tested its intermediate-range ballistic missile, the Agni, in late January 2002. The U.S. response, Indian officials were quick to note, was much more muted than those of the Europeans and the Japanese.

But it is Pakistan that continues to preoccupy India's external relations. Given this reality, the "transformation" in U.S.-India ties will prove ephemeral if the United States adopts a stand on Kashmir that India considers unfriendly or if Washington transfers sophisticated military equipment, such as F-16 fighter-bombers, to Islamabad. Indian memories of past large-scale U.S. military help to its neighbor are still fresh. Interestingly, India does not feel its interests are threatened by stronger U.S.-Pakistan ties with their current emphasis on economic help. Indeed, New Delhi acknowledges that India stands to gain if Pakistani President Pervez Musharraf succeeds in clamping down on Islamic fundamentalists and in focusing Pakistan's energies on its internal development.

Nevertheless, Washington's sudden re-embrace of Islamabad after Musharraf joined the war against terrorism raised deep concerns in New Delhi. India understood the U.S. need for Pakistan's help in the struggle against the Taliban and al Qaeda. Still, it was a severe blow to see the country that New Delhi blamed for terrorist attacks against India once more praised as a U.S. ally.

The White House, sensing India's concern, rolled out the red carpet for Singh when he visited Washington in October 2001 and again for Vajpayee the following month. The Indian government received assurances from the Bush administration that India's terrorist problems would not be ignored, but that it was first necessary to prosecute the war in Afghanistan. While Singh was still in Washington, however, terrorists attacked the Kashmir State Assembly, killing 38 people. This incident sorely tried India's patience with U.S. policy. With Pakistan playing such a key role in the war in Afghanistan, many Indians feared that the Americans would turn a blind eye to continuing ISI support for cross-border infiltration into Indian-held Kashmir.

WARS ON TERRORISM

The moment of truth came on December 13, 2001, when suicide bombers attacked the Indian parliament building in New Delhi. These terrorists, allegedly belonging to groups linked to the ISI, tried to blow up India's political leadership, and their failed attempt had a galvanizing effect on the government. Vajpayee and his key advisers -- Home Minister Lal Krishna Advani, Foreign Minister Singh, National Security Adviser Brajesh Mishra, and Defense Minister George Fernandes -- decided that India would not take any more Pakistani provocations. They were ready to go to war, notwithstanding the two countries' nuclear weapons, if Pakistan refused to end its support for terrorism against India.

After Islamabad failed to respond to diplomatic pressure -- including the interruption of rail and air links, the thinning of diplomatic staffs, and the recall of India's High Commissioner -- New Delhi raised the stakes militarily, amassing forces along the entire border with Pakistan and strengthening existing troop concentrations along the Line of Control in Kashmir. There was talk of retaliatory strikes against jihadi training camps on the Pakistani side of the Line of Control. The Indians, underscoring their seriousness, stressed their view that it was possible to fight a war with Pakistan below the nuclear threshold.

This exercise in coercive diplomacy quickly got Washington's attention. Anxious about the threat of nuclear war as well as the impact of the crisis on the struggle against the Taliban and al Qaeda, the Bush administration sprang into action. In almost daily telephone calls, Powell, buttressed at times by Bush, urged Musharraf to meet India's demands. At the same time, U.S. leaders cautioned their Indian counterparts against any precipitate military moves. To India's satisfaction, the United States also took an action that it had previously resisted: putting the Jaish-e-Mohammed and the Lashkar-i-Taiba -- the two militant Pakistani Islamic groups that India blamed for much of the trouble in Kashmir -- on its list of foreign terrorists.

With the temperature between Islamabad and New Delhi nearing a boil, Musharraf announced a major policy shift on January 12, 2002. By stating that his country would no longer be a base for foreign terrorism, the Pakistani leader implicitly pledged to end ISI support for attacks across the Line of Control. Musharraf also hit hard at domestic Islamic fundamentalists, calling for an end to the extremism and violence that have wracked Pakistan in recent years. Although privately pleased with the speech, the Indian government's official reaction emphasized that Musharraf's words needed to be translated into deeds before India would lower its guard.

In Indian eyes, the December 13 attack put not just Pakistan, but also the United States, to the test. Had Washington waÛed rather than confronted Islamabad's support for terrorism in Kashmir, the U.S.-India rapprochement would have faded. But despite its lavish public praise for Musharraf, the Bush administration has kept up the pressure on him. Although the United States has repeatedly urged renewed dialogue between India and Pakistan, it has accepted India's insistence on first having proof that ISI-backed infiltration into Kashmir has stopped.

Whether such Pakistani sponsorship has truly ended, however, will not become fully clear until late spring, since during the winter months infiltration routes across the Line of Control are blocked by snow. If, when the weather warms, India finds that Pakistan has not delivered what it promised, a fresh crisis is certain. Indian military strikes across the Line of Control will probably follow; regardless of the risks involved, Vajpayee has made it a point of national honor that he will stop Pakistan's clandestine movement of militants into Kashmir. On this issue, moreover, he has the strong support of the Indian public and the political opposition.

On the other hand, if infiltration by militants across the Line of Control ends, the Indians are likely to pull back their forces, lift the ban on rail and air traffic across the border, and resume dialogue with the Pakistanis. Given the widely divergent views of the two governments, however, early progress is unlikely on the issue of Kashmir itself. Yet New Delhi and Islamabad could reduce mutual mistrust by addressing related questions such as the conflict over the Siachen Glacier -- a strategically useless but fiercely contested piece of terrain located in Kashmir at an altitude of 18,000 feet.

The United States has made clear that it will not mediate between the two countries, something India has long opposed and Pakistan has long sought. Still, New Delhi no longer looks askance at diplomatic engagement by Washington, which worked in India's favor in the crisis following the attack on the parliament and during the earlier Kargil conflict. Indeed, with its currently close relations with both countries, the United States should not shy away from lending a discreet hand to help India and Pakistan begin a process of serious and sustained dialogue.

THE HOME FRONT

Despite Vajpayee's effective management of foreign policy, his standing has suffered recent setbacks, including losses for his party in three state assembly elections and the outburst of serious Hindu-Muslim violence in the western state of Gujarat. Still, his governing coalition is not in immediate danger of losing its majority. Smaller parties seem unlikely to bolt for now. And the coalition's greatest asset may be Vajpayee himself, who remains India's most respected public figure.

But Vajpayee is aging, and his health problems (he has had both knees replaced) have sapped his drive and energy. The 77-year-old prime minister, moreover, gives his unwieldy coalition cabinet considerable leeway. Although the cabinet has successfully handled national security matters, its performance on domestic issues has been uneven. The biggest problem, however, has been that the BJP-led government has neither offered better governance nor proven any less prone to corruption than its predecessors. The most dramatic jolt came in early 2001, when journalists posing as arms vendors videotaped themselves handing over bribes to the BJP president and the head of the Samata Party, a key coalition partner.

Signaling growing public dissatisfaction, the Congress Party defeated the Akali Dal-BJP coalition in Punjab and beat the BJP in the new state of Uttaranchal in February's state assembly elections. Meanwhile, in Uttar Pradesh, India's most populous state, the BJP took a drubbing from regional parties supported by lower-caste Hindus. Anger over the poor performance of the state governments was a decisive factor in the anti-BJP tide. Although questions of caste and religion still dominate Indian politics, voters have shown an increasing willingness to punish poor administrative performance.

The results of recent assembly elections indicate a significant comeback by the Congress Party, which ruled India at the national level for 45 of the 54 years since independence. Congress and its allies now control 14 states, whereas the BJP and its allies rule in only 4. Unless the BJP does a better job in the two remaining years of its national term, Congress could regain power in New Delhi in the next elections. The party's major uncertainty is its continuing reliance for leadership on the Nehru-Gandhi dynasty, now represented by Sonia Gandhi, the Italian-born widow of former prime minister Rajiv Gandhi. Although she displayed greater self-assurance and more fluent Hindi on the 2002 campaign trail, her foreign birth could remain an electoral problem. Still, voter reaction to the BJP's record may well overshadow these concerns.

Whether the BJP or Congress wins, India has entered a period in which neither of the two major parties is likely to gain a parliamentary majority; both will have to rely on smaller coalition partners to form a government. The BJP lacks strength in southern India, whereas Congress continues to be weak in the populous northern states of Uttar Pradesh and Bihar.

Should Congress win, drastic changes in either economic or foreign policy are unlikely. The major difference between the two largest parties relates to their vision of India. Congress stresses its support for a secular and multicultural country that is sensitive to the concerns of its minorities, especially Muslims. The BJP, particularly its hard-line supporters in the Rashtriya Swayamsevak Sangh (RSS) and the Vishwa Hindu Parishad (VHP), wants an India that more fully reflects Hindu values, which it terms Hindutva. Since taking office, Vajpayee has tried to soft-pedal the Hindu extremist agenda on which the BJP rode to power. Although the government has begun a controversial effort to rewrite Indian textbooks to play up Hindu achievements and play down those of Muslims, its generally moderate approach has gone down badly with hard-core activists in the RSS and the VHP.

These groups want to press ahead with the emotionally symbolic but politically explosive act of constructing a Hindu temple at Ayodhya in Uttar Pradesh on the alleged birthplace of Lord Ram, a leading Hindu deity. (In 1992, the destruction by BJP-led mobs of a mosque that had stood on the site touched off the worst Hindu-Muslim disturbances since independence.) The outbreak of savage communal violence in Gujarat in March 2002 -- after Muslims burned a train carrying Hindu volunteers back from Ayodhya and in retaliation Hindu mobs killed hundreds of Muslims -- once more revealed the fragility of India's social fabric. Neither the BJP-controlled Gujarat state government nor New Delhi responded with vigor to quell attacks that Vajpayee called "a national shame." In the wake of the rioting in Gujarat, how well the BJP leadership deals with this dangerous challenge and the related demand for temple construction in Ayodhya will profoundly affect the future of the Vajpayee government as well as India's social peace and international image.

SLOWING DOWN

Another important determinant of Vajpayee's political future will be his handling of the economy. Here his government's record has been mixed.

Since 1998, when a BJP-led coalition first took office, GDP growth has slowed, dropping from highs of 7 percent in the mid-1990s to 5.4 percent in 2001-2. Although this growth rate remains higher than that of any other Asian country except China, the economy is weighed down by central and state government deficits amounting to ten percent of GDP and the lowest industrial growth in a decade. The government has also made only limited progress in implementing a range of reforms proposed by Finance Minister Yashwant Sinha a year ago. In his 2002 budget, Sinha implicitly admitted the economy's weakness by offering what many observers considered an accountant's approach to the nation's finances. The budget balanced revenue decreases, including cuts in corporate taxes, with revenue increases such as a five percent income-tax surcharge to fund a substantial boost in defense spending. Sinha notably did not repeat last year's call for further bold reforms.

A number of bright spots do exist. Foreign-exchange reserves have grown substantially, passing the $50 billion mark for the first time. Inflation has ceased to be a threat, tumbling to just two percent in the early months of 2002. Indian agriculture also enjoyed a bumper year thanks to an exceptionally good monsoon. But high procurement prices have resulted in India's accumulating massive stocks of food grains -- an embarrassing 58 million tons. The budget calls for restructuring agricultural prices and reducing fertilizer subsidies, but only time will tell if the government is willing to risk the wrath of the farm lobby to implement the proposals.

The services sector, now producing almost half of GDP, has been the economy's strongest performer in recent years. The star continues to be information technology (IT). Even though the global recession and the high-tech crash in the United States slowed India's IT growth from a spectacular 50 percent in 2000, it still registered an impressive 30 percent advance in 2001. Sales in 2001 reached $13.5 billion, including $6.2 billion in exports, two-thirds of which were to the United States. The it sector barely existed a decade ago, but it now accounts for nearly 3 percent of India's GDP and about 15 percent of its exports.

India's large pool of well-educated, English-speaking computer specialists whose wages, although high by Indian standards, remain well below those in the United States, makes it an attractive source of software and computer services and location for it development facilities. Good satellite communication links, the absence of government controls, and even geography favor the industry. India's physical location halfway around the globe from the West Coast of the United States enables companies to enjoy what amounts to a 24-hour work day. The related computer-based services industry (call offices and help lines, medical transcriptions, and back-office operations for large organizations such as airlines and banks) also has a promising future. It may reach $17 billion in annual turnover and employ more than a million people within a few years.

In contrast, traditional industry and manufacturing, which boomed in the early 1990s when freed from burdensome government controls and restrictions, have slumped badly. Relatively steep interest rates, high import tariffs, rigid labor laws, and poor infrastructure help explain why India's industrial sector is in the doldrums and increasingly uncompetitive in the global market.

A further problem has been the drop in investment from abroad. Against the Vajpayee government's target of $10 billion in foreign direct investment a year, only about $2.5 billion is currently flowing in. Previously regarded as the pillar of improved U.S.-India bilateral relations, investment from the United States has also slumped. After peaking at $737 million in 1997, it averaged only $371 million over the next three years and fell below $250 million during 2001. Bilateral trade has also failed to expand as rapidly as hoped, reaching only $14 billion in 2001. And the trade has been mostly one way: thanks to $3.8 billion in it exports, Indian sales to the United States rose to $10 billion, but U.S. exports to India remain flat at $4 billion. America continues to be India's largest trading partner, but India ranks only 25th for the United States.

LIGHTS OUT

The challenges for foreign investment and economic liberalization in India are highlighted by the ill-fated Dabhol electric power project in the state of Maharashtra. The biggest U.S. investment in India, this mammoth $2.9 billion construction has turned into a nightmare. Quite apart from allegations of corrupt practices by Enron -- which had a 65 percent share in a consortium that involved General Electric, Bechtel, and major Indian financial institutions -- the project was fundamentally flawed. The sole consumer for the plant's power, the Maharashtra State Electricity Board (MSEB), could not afford to pay the high electricity prices set in the contract.

At present, Dabhol and the MSEB have tied each other up in legal knots. Although the Indian government says that it will honor its guarantee to back the contract, neither it nor the Maharashtra government (led by the opposition Congress Party) has actively sought a solution. Meanwhile, Enron, which was trying to sell its Dabhol holdings even before its bankruptcy, has closed its India operations. The first phase of the project generated electricity for a year but has been shut down. Construction has stopped on the second phase, which is 90 percent complete. As a result, the Dabhol plant stands idle even though India remains chronically short of electricity.

The Dabhol affair reveals an open wound in the economy: India's electric-power system, principally made up of money-losing state electricity boards. The main cause for the red ink, which amounts to about one percent of GDP, is no mystery: large-scale theft or refusal to pay for power, euphemistically called "transmission and distribution losses." The World Bank estimates that these "losses" constitute 18 percent of the total power generated. The Vajpayee government has floated proposals to rationalize the state electricity boards but has found little support for such measures. State-level politicians, civil servants, and consumers who gain from the current system have so far prevented reform.

Apart from electricity problems, India's inadequate physical infrastructure continues to impede faster growth. Although there has been a start on building a national highway system and progress in modernizing telecommunications, the overall picture is not promising. For one thing, the high fiscal deficits run up by central and state governments -- constituting ten percent of GDP -- have made it difficult for the government to secure sufficient public funds to invest in infrastructure. Much of the deficits comes from economically unproductive spending, such as covering the deficits of the state electricity boards or money-losing public-sector industries. Populist subsidies for farmers and other special-interest groups aggravate the problem. To its credit, the Vajpayee government has begun selling off government-owned industries or at least allowing private companies to buy management control. Although politicians on both the far left and the far right have fought privatization, Vajpayee has stood behind his determined disinvestment minister, Arun Shourie.

WHITHER INDIA?

The Vajpayee government swiftly joined the war on terrorism and intensified cooperation with the United States after September 11. Acting decisively, India went to the brink of war with Pakistan in order to compel Islamabad to end its decade-long bleeding of Indian forces in Kashmir through ISI-supported violence. In the wake of September 11, ties between New Delhi and Washington are closer than they have been in four decades. With Cold War differences now history, both India and the United States are emphasizing common political, security, and economic interests as the basis for a much friendlier and closer relationship.

But the Vajpayee government has not matched its success in foreign affairs with parallel achievements at home; indeed the BJP-led coalition is showing signs of wear and tear in handling domestic issues. The sluggish response to savage communal violence in March 2002 in Gujarat, a BJP-run state, tarnished the Vajpayee government's image. The BJP leadership also faces a tough challenge in calming its Hindu extremist supporters, whose explosive mixture of religion and politics threatens India's tenuous social peace. At the state level, a poor governing record has led to a string of BJP electoral defeats, most recently in February 2002, and the resurgence of the opposition Congress Party. If the BJP fails to improve its overall performance, it could well lose the next national elections, which are due by fall 2004.

On the economic front, the government's uneven record poses a further electoral problem. Although there are some bright spots, the fiscal deficit remains dangerously high and the coalition's rhetoric has outrun its performance in implementing the so-called second wave of reforms -- energizing a lethargic bureaucracy, trimming unproductive and costly populist subsidies, reforming India's bankrupt electric power system, and accelerating the modernization of the country's weak physical infrastructure. Unless the Vajpayee government musters greater political will to tackle these issues, six percent (let alone seven percent) GDP growth will remain out of reach. Still, Indian governments, including Vajpayee's, have demonstrated an ability to pragmatically balance competing concerns. Given this capacity, India will surely attain its goals of reducing mass poverty and developing the modern and dynamic economy needed to sustain great-power status. The only question is, How long will this take?