New Government In India Pledges To Push Growth

After Congress Party Win, Sonia Gandhi Is in Line to Be First Foreign-Born Leader

JAY SOLOMON and ERIC BELLMAN / Wall Street Journal 14may04

NEW DELHI—Voters left behind by India's booming economy threw out the government and handed power to the party of the country's most famous political figure, Sonia Gandhi, who pledged to continue but widen economic liberalization.

Her winning Congress Party is likely to choose the Italian-born widow of former Premier Rajiv Gandhi, who was assassinated in 1991, as its candidate to form India's next government. In governing, Congress officials said, they would emphasize not only the changes that have ignited India's long-stagnant economy through technology, foreign investment and trade, but also rural and agricultural programs to help the 700 million Indians who don't live in cities.

Underscoring their commitment to economic growth, officials recalled that the changes that unleashed rapid growth in India were begun more than a decade ago, under a previous Congress government.

"We started it, and will do it more efficiently," said P. Chidambaram, a senior Congress official and former finance minister.

Indian investors seemed confident that growth—which raced along at 8% last year—would continue. Many had feared a divided Parliament unable to quickly agree on a new prime minister, and they reacted positively to the strong showing by the Congress party. India's Bombay Stock Exchange index ended the trading session 1% higher Thursday from the previous close after falling more than 3% earlier in the day. The index has lost more than 7% since India's three-week election process started April 20; the value of the Indian rupee has weakened almost 4% against the dollar during that period.

The election represents a huge victory for the 57-year-old Mrs. Gandhi, who through her marriage to Rajiv Gandhi became heir to one of the world's great political dynasties. His mother, Indira Gandhi, was prime minister for a total of 15 years before she was assassinated, and his grandfather was Jawaharlal Nehru, who pioneered many of the inward-looking, socialist practices that shackled India's economy for years.

Mrs. Gandhi campaigned relentlessly through India's impoverished countryside calling for more focus on uplifting the nation's farmers and disadvantaged, and attacking the record on poverty of Prime Minister Atal Bihari Vajpayee's Hindu-nationalist Bharatiya Janata Party, or BJP. (See related article1.)

At the same time, Congress politicians promised to continue India's moves to attract foreign investment and millions of service jobs being outsourced from the U.S., Europe and parts of Asia.

The movement of jobs to India has become a hot-button topic in the U.S. But it also has proved controversial in India, where people fret that their traditional way of life is threatened by young workers picking up Western values as they work for call centers or software firms focused on the U.S. and Europe.

Yet economic growth has been a force of power positive transformation, too. The BJP cut tariffs and reduced the barriers for foreign investment in India. It also aggressively sought to sell off dozens of India's inefficient state-owned companies. The result is that India grew at its fastest rate in 15 years in the quarter ended Dec. 31, at 10.4%. Foreign investors sank a record $7.7 billion into Indian assets in 2003, and some $4 billion so far this year.

Nandan Nilekani, chief executive officer of Infosys Technologies Ltd., India's third-largest software producer, said: "In India today, there is broad consensus across all parties that reform is irreversible and India has a unique advantage in the IT [information technology] and outsourcing industries."

Prior to the election, critics questioned Mrs. Gandhi's leadership skills and whether Indians would accept a foreign-born person as their prime minister. Some political analysts said Congress could make another person prime minister should its coalition partners—which will include leftist parties—not accept her. They said one alternative might be Manmohan Singh, the Congress finance minister who initiated India's liberalization program in 1991. But now Mrs. Gandhi, barring opposition from the minority parties needed to form a coalition government, seems likely to end up the leader of the world's second most populous nation.

Ghulam Nabi Azad, Congress party general secretary, said he's sure she will be India's new prime minister. "She will be the prime minister ... For stability, it is necessary that the prime minister be from the single largest party, that is the Congress party and our candidate is Sonia Gandhi," he said after meeting her Thursday.

For the BJP, meanwhile, the jarring defeat underscored the fickle nature of Indian politics. Mr. Vajpayee's party had been widely favored in the election after aggressively pursuing changes that helped transform India into one of the world's fastest-growing economies.

The BJP had been expected to gain support, too, because of Mr. Vajpayee's success in repairing tattered relations with Pakistan through a peace initiative last year that has significantly reduced tension between South Asia's two nuclear rivals.

Thursday, leaders from the Congress party and Pakistan government officials said peace talks would continue under a new Indian government. "The dialogue with Pakistan will continue. There will be no changes," said Kapil Sibal, a Congress spokesman.

Politicians and analysts say the BJP's principal campaign theme of growth and development, dubbed "India Shining," was undercut by widespread disaffection among the largely rural population, many of whom saw few immediate benefits from the country's economic and technology boom. Indeed, the Congress and its allies latched on to the BJP's campaign theme to depict the ruling party as deeply out of touch with the realities facing India's impoverished masses. The BJP's coalition fared worst in areas like Andhra Pradesh and Tamil Nadu—both coastal states in the south—where the divide between the country's high-tech hubs and surrounding poverty-ridden villages is most stark.

Mrs. Gandhi's political ascendance is the unlikely culmination of a four-decade odyssey, which began at a restaurant in Cambridge in 1965. An 18 year old, she was learning English at a language school in the city when she met Rajiv Gandhi, who was studying engineering at Cambridge University. Friends of the family say Mrs. Gandhi knew next to nothing about India but quickly fell deeply in love with Mr. Gandhi, a scion to India's most important political family. They were married three years later.

Mrs. Gandhi made the difficult transition from living in a village outside of Turin, Italy, to residing in the home of India's then prime minister, Indira Gandhi. The older Mrs. Gandhi was an imposing figure in India's history, who declared a state of emergency in 1975 and dissolved Parliament. Sonia Gandhi, however, said her mother-in-law was essential in helping her become an Indian and understand the importance of Congress's struggle for independence from the British.

Over a decade, from 1984 to 1991, Mrs. Gandhi was to lose the two most important figures in her life in India. Indira Gandhi was assassinated by her Sikh bodyguards in 1984; Rajiv Gandhi was killed in 1991 while campaigning in India's south. A close friend of Mrs. Gandhi's said her husband's murder "nearly destroyed her." Indeed, Mrs. Gandhi wrote in a memoir about her husband that she had "fought like a tigress" to prevent him from entering politics, fearing for his safety. She has also said she was very reluctant to let her children join politics for the same reason.

Still, in 1998, Mrs. Gandhi herself jumped into the political fray fearing that the Congress party was about to collapse. "I felt I was being cowardly to just sit and watch things deteriorate in the Congress for which my mother-in-law and the whole family lived and died," Mrs. Gandhi said in a February interview on New Delhi Television.

Late Thursday, the Associated Press reported that the official vote tally showed the Congress and its allies would win 217 seats in India's 543-seat lower house of Parliament, or Lok Sabha, while the BJP and its coalition partners trailed with 187 seats. A party needs the backing of a total of 272 lawmakers to form a government.

"The major mistake of the BJP was they didn't increase investment in agriculture. There was rural discontent all over the country," said Prakash Karat of the Communist Party of India, which is among four leftist parties expected to cumulatively win at least 62 seats. This leftist grouping could play a central role in forming a new Congress-led coalition government.

But Congress officials indicated the new government's economic strategy wouldn't veer back to the socialist past although it would stress policies aimed at poorer Indians. Mr. Chidambaram, the former finance minister, said that a Congress government's economic policies would emphasize investment in agriculture and improvements in the country's education and health-care systems.

Congress officials also said that they'd push to increase India's annual economic growth to 10% from the 8% it is estimated to have achieved in the fiscal year ended March 31. They also said they would continue policies pursued by the BJP to cut tariffs and reduce restrictions on foreign investment.

India's business community largely voiced confidence in the prospect of a Congress-led government, but some executives suggested that the expected influence of leftist parties could slow the pace of reforms. "The process [of reform] will continue, but it may slow down, especially for the first year until they find their feet," said Rahul Bajaj, chairman and managing director of Bajaj Auto Ltd., India's largest producer of motorcycles and scooters. "We will keep investing and keep expanding."

The BJP's defeat marks the end for a government responsible for some fundamental changes in India since it took power in 1998. Just weeks after entering office, Mr. Vajpayee rattled the world by testing five nuclear devices in the Indian desert. The tests ended New Delhi's decades-old policy of maintaining a strategic ambivalence on its atomic weapon capabilities and prompted Washington to slap economic sanctions on India. Pakistan responded weeks later by testing its own nuclear devices.

In 2002, India and Pakistan almost went to war after Islamic militants—allegedly backed by Islamabad—attacked India's Parliament building in New Delhi, sparking fears South Asia could see the world's first nuclear exchange. Mr. Vajpayee subsequently massed tens of thousands of troops on Pakistan's border before Washington helped negotiate a military stand down by both sides.

But Mr. Vajpayee has used his last two years in office to seek stability in South Asia as a means of underpinning India's economic growth. He launched largely successful peace initiatives towards both Pakistan and China - both India's historic adversaries. Islamabad and Beijing continue to express confidence that the engagement process is bearing fruit.

The BJP also broke India's long-held tradition of maintaining secularism in government. The party came to power vowing to promote the culture of India's majority Hindu population, damaged, they charged, by centuries of rule of India by the British and by Muslim kings. In the campaign for the 1998 vote that brought the BJP into power, the party's leadership called for a ban on cow slaughter, the conversion of a number of Islamic mosques into Hindu temples, and the scraping of affirmative action policies they charged favored India's 150 million Muslim population, the world's second-largest.

While Mr. Vajpayee didn't pursue these policies once in office, the BJP's strong Hindu-nationalist image still tarred his government's record. Wide-scale rioting in the state of Gujarat in 2002 resulted in the deaths of about 2,000 Indians, most of them Muslim. The BJP's state government in Gujarat has been accused of tacitly supporting the violence against the Muslims, and India's Supreme Court is still investigating the incident.

In Thursday's voting, the BJP lost seven seats in Gujarat, a sign, political analysts said, that the BJP's Hindu nationalism has been rejected even in one of its expected strongholds. "The BJP has divided our community on communal lines," said Girish Patel, a human rights lawyer based in Gujarat. "They've completely isolated the Muslims."

Still, Mr. Vajpayee's willingness to push ahead with economic reforms was perhaps the most important hallmark of his government. In particular, he fought to force through the sales of India's stable of largely inefficient state-owned companies, despite strong opposition from labor unions and the left-wing parties. The BJP party also took the unprecedented step of accelerating reforms heading into this year's election, slashing tariffs and raising the foreign investment limits in the banking and oil and gas sectors.

Indian and foreign investors are likely to scrutinize the new Congress-led government to see how strongly it is committed to continuing such reforms. India's four communist parties-which are expected to support the Congress coalition-have traditionally fought against foreign investment and government privatization. But their leaders have signaled in recent years that they're changing their stance as India battles China for economic growth.

In the state of West Bengal, a communist-controlled government has aggressively wooed foreign investment, pushed through labor reforms and begun privatizing their own state-controlled companies. In the process they have turned West Bengal's state capital, Calcutta, into a high-tech zone and attracted the likes of International Business Machines Corp. and PepsiCo Inc. to make major investments in their state.

"We are not opposed to reforms as it helps the interests of the people," said Somnath Chatterjee, a senior Communist Party official from West Bengal. "We are seeking to provide good services and an investor friendly environment."

The new government's clout will also likely depend heavily on Mrs. Gandhi's performance, should she be named prime minister. Going into the election, she was widely seen as headed for political irrelevance, because Congress appeared to most analysts as unlikely to seriously threaten the BJP.

But Mrs. Gandhi capitalized on the enduring authority of her family's political dynasty - her late mother-in-law, Indira Gandhi, also served as prime minister and was the daughter of independent India's first premier Jawaharlal Nehru. Sonia Gandhi used her two children, Rahul Gandhi and Priyanka Gandhi Vadra, extensively during the campaign, and they were often greeted with almost a religious reverence by crowds.

The Congress official said a new government would continue the sales of state-owned companies, though in a more selective fashion than the BJP's divestment program. The Congress has attacked the BJP for seeking to sell-off strategic assets, such as oil and gas companies, and state-owned firms that are profitable.

Shy and unassuming, Mrs. Gandhi withstood blistering personal attacks from the BJP for her foreign heritage, and many of the party's leadership still say that still shouldn't assume the post of prime minister. The Gandhi family, however, is now saying she's earned it.

"I have seen my mother fight with her back to the wall. And she has won. She has won against all odds," Rahul Gandhi told reporters Thursday, smiling broadly and garlanded with marigolds.