INDIA: RAJIV GANDHI'S ECONOMIC POLICIES--EARLY SIGNPOSTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000405800001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 27, 2010
• Sequence Number: 1
• Publication Date: January 31, 1985
• Content Type: REPORT

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O
Central Intelligence Agency
31 January 1985
India: Rajiv Gandhi's Economic Policies -- Early Signposts
Summary
approach, but temper their expectations with caution.
to economic positions, and initial instructions to the bureaucracy
point to an emphasis on modernization, efficiency, and pragmatism in
economic policy. Private businessmen are enthusiastic about the new
Prime Minister Rajiv Gandhi's speeches, interviews, appointments
intensification of export promotion efforts.
Improvement in industrial productivity is likely to be'a dominant
theme. Rajiv hopes to achieve this through a) assimilation of modern
technology, and b) greater efficiency within the public sector via de-
centralization of decisionmaking, possibly even near autonomy for pub-
lic sector corporations. Other important new measures will include
the simplification of controls on private industrial production, al-
though the industrial licensing system is likely to continue, and the
Rajiv's ability to implement his drive for productivity will
probably be constrained by balance-of-payments and domestic budget
problems, about which he has not yet commented. Moreover, moving the
ponderous Indian bureaucracy has always proved difficult.
This memorandum was prepared byl
Subcontinent Branch, South Asia
25X1
Division, Office of Hear Eastern and South Asian Analysis. Information avail-
able as of 22 January 1985 was used in its preparation. Comments and queries
are welcome and may be directed to the Chief, Subcontinent Branch, South Asia
Division, MESA,
25X1
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Rajiv's interest in economic policy, in our judgment, is second only to his
interest in national unity issues such as problems in Punjab and Assam. He will
pursue an economic policy with more specific goals than his mother; the emphasis
will be on improving industrial productivity. Under Indira Gandhi, the theme of
economic liberalization emerged only after a multitude of minor relaxations of
government regulations.
Productivity and Technology
Technology will clearly be a major component of Rajiv's drive for improved
industrial productivity.
o His major policy speech of 5 January noted that improvements in productivi-
ty, absorption of modern technology, and fuller use of capacity must ac-
quire the status of a national campaign.
o During recent press interviews he noted that India has to improve its abil-
ity to transform competence in basic research into production.
o Earlier he emphasized that India must not be left behind in the scientific
revolution in electronics.
The Congress Party platform also stressed these themes, and Rajiv has asked the -
bureaucracy for specific proposals. 25X1
The Indian gcal of self-reliance will present some obstacles to the acqui-
sition of imported high-technology. Recent press reports indicate no backing
away from efforts to protect and stimulate fledgling domestic industries, in-
cluding locally produced computers and oil exploration equipment. Rajiv's focus
will be on absorbing -- not simply acquiring -- technology. 25X1
So far, Rajiv seems to have a relatively narrow view of what must be done
to improve productivity. Although his public statements and initial meetings
with bureaucrats have gone beyond technology to emphasize improved public sector
management and educational reform, he has stopped short of addressing the criti-
cal problems of prices, financial resources, labor relations, and infrastruc-
ture. Some of Rajiv's advisers -- including Manmohan Singh, new Planning Commis-
sion chief -- have a comprehensive view that may eventually be reflected in
policies of the new government. Rajiv's approach, in any case, is more sophis-
ticated than his mother's; she seemed to believe technolo ical gains were possi-
ble without major institutional change. 25X1
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Public vs Private Sector
Rajiv's 5 January speech reaffirmed that the public sector will continue to
be a major tool of economic development. The Congress election manifesto de-
scribed the public sector as the main instrument for stepping up industrializa-
tion.
At the same time Rajiv has said that the public sector is active where it
should not be, and that sick industries cannot be supported indefinitely. Ac-
cording to the press, the Sengupta committee report on the public sector -- com-
missioned before the assassination -- considered the closing of non-viable
units. We have seen no hints of plans to denationalize any heavy industry, how-
ever. There have been some hints of a new textile policy and we speculate that
this may involve closing or denationalizing some unprofitable public textile
factories.
Rajiv has stressed the need to improve management within the public sector,
and may be planning to free public sector corporations to operate as commerical
entities under only minimum ministerial control. His 5 January speech called for
far-reaching administrative reform, including decentralization of decisionmaking
with ''enforcement of accountability,'' and Rajiv repeated this theme when dis-
cussing industrial policy with senior bureaucrats. 25X1
In our view, Rajiv's comments on the need, to decentralize decisionmaking
apply solely to the central government bureaucracy and public sector corpora-
tions. He has not indicated any plans to transfer economic authority from the
central government to the states, and the Congress Party platform contends that
there is no contradiction between a strong center and strong states. if Raviv
does move to change center-state economic relations, it will probably be as a
result of efforts to ease tensions in Punjab and Assam, not a result of his eco-
nomic policy views.
Rajiv may intend to reinstate the Planning Commission as a major policy ad-
visory group, but nevertheless seek a less ambitious Five Year Plan. He recent-
ly appointed the two leading government advocates of economic liberalization to
the Planning Commission -- Abid Hussain, whose term as secretary at the Commerce
Ministry has just expired, Sand Manmohan Singh. Although Rajiv has reaffirmed
the government's commitment to planning, he may follow Manmohan Singh's advice
to drop efforts to develop detailed economic targets and instead concentrate
planning efforts on vital sectors and non-tradeable goods such as power, trans-
port, and irrigation.
As for the private sector, last November Rajiv said that it has ''adequate
scope'' to enhance its production. During a January interview with a US maga-
zine, he noted, with apparent approval, that new areas had been opened to pri-
vate investment -- probably a reference to the new telecommunications policy --
but did not hint at further moves.
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Industrial Controls
We expect Rajiv to loosen government restrictions on private industry,
mainly to spur output, but also, as he said in a January interview, to reduce
opportunities for corruption. One of his first moves was to shift the govern-
ment department that supervises private corporations to the Ministry of Indus-
tries, whose bureaucratic bias favors production rather than restraint. He has
told bureaucrats to simplify industrial control proceedures by issuing licenses
for a range of products rather than specific items and by permitting certain in-
dustries to expand without prior government permission. Rajiv also wants to 25X1
Rajiv apparently intends to retain the industrial licensing system, perhaps
in modified form. It will be used to implement new pollution controls that were
imposed on 18 industries after the Bhopal disaster. In addition, press reports
indicate that Rajiv will favor small-scale industries and backward areas. In the
past this had been done through licensing controls as well as credit policies
and subsidies.
Rajiv has not commented on regulation of the economy through financial
rather than administrative controls. This topic was discussed by businessmen
and officials in the months before the assassination, but a report commissioned
by Indira Gandhi has not yet been released. Official enthusiasm for the shift
may have been tempered by a recent Bombay High Court decision, which held that
government financial institutions could not act like an ordinary shareholder,
but could intervene in corporate management only to protect their investment.
Pending further judicial review, this seems to close an opportunity for the gov-
ernment to regulate the pattern of private investment through the financial in-
stitutions.
Rajiv may rely more on tariffs and less on licenses to regulate imports.
Although he has not commented on import licensing controls recently, the new
computer policy, which is still not fully formulated, seems to be a step in this
direction. 25X1
Export Promotion
Rajiv has called for concrete steps to give a fresh impetus to exports. He
is probably considering an unpublished report, recently completed under the su-
pervision of Abid Hussain, which reviewed export promotion measures and consid-
ered changes in import policy that could help conserve foreign exchange. Ac-
cording to the US Embassy, this report recommends further tax concessions and
import privileges for exporters. Rajiv wants to move on this within the next
few weeks, perhaps even before the annual April trade policy statement and in
time for the presentation of the central government budget at the end of Febru-
ary.
Within the bureaucracy -- and perhaps unknown to Rajiv -- several measures
that could affect trade policy have been mooted recently:
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o A committee that has spent two years studying a strategy for expanding ex-
ports of engineering and capital goods has recommended more subsidies and
concessional freight rates, liberal access to foreign technology, and --
for industries with a strong export potential -- removal of restrictions on
production by foreign and large companies.
o A Planning Commission study favors new policies to push sales of engineer-
ing goods, chemicals, gems, leather products and marine products.
o The bureaucracy is pushing ahead with countertrade -- the linking of some
import purchases with exports of Indian goods and project services.
Rajiv apparently sees export promotion as part of his program to improve
economic efficiency, rather than part of a strategy to ease balance-of-payments
problems. He has said nothing so far about growing Indian debt service obliga-
tions or declining concessional foreign aid. His counsel to move away from de-
pendence on military assistance from the Soviet Union suggests he may not be
fully aware of forthcoming payments problems
Agriculture
Central government support for agriculture through research programs, pro-
curement policies, and financial help to state governments will probably contin-
ue. Agriculture was a key theme of the Congress Party manifesto, and Rajiv's
enthusiasm for industrial efficiency may carry over to agriculture and lead to
new additional efforts to promote agricultural exports and improve irrigation.
Rajiv's lack of comment on agricultural policy, however, suggests that he is not
contemplating any major policy changes beyond those already underway and summa-
rized in the guidelines for the Seventh Plan. 25X1
called for two new government organizations to deal with the problems of de-
forestation and Ganges river pollution. These topics are not yet a major focus
Rajiv is interested in ecology. The published text of his 5 January.speech
of government policy, but may become more important in the future.
Constraints on Policy Options
Congress dominance of parliament does not give Rajiv a free hand in modern-
izing the economy. Shortages of government revenue and forthcoming balance-of-
payments strains limit his ability to promote productivity through tax conces-
sions and increased imports. He must still consider the views of businessmen
who welcome the protection from competiion provided by import and production re-
strictions. Rajiv must also be cautious about trying to reduce public sector
losses through an increase in administered prices or closing unprofitable units
that employ many people lest he add to the social unrest already caused by com-
munal problems. Furthermore, bureaucrats have traditionally resisted efforts to
reduce their authority. 25X1
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Private Businessmen-Enthusiastic
Indian industrialists and traders are enthusiastic about the new govern-
ment's pragmatism and sense of urgency, according to press and Embassy reports.
Some highlight Rajiv's drive to make the bureaucracy more efficient. Others look
for a relaxation of import and licensing proceedures and of restrictions on for-
eign and large domestic corporations. In the absence of specific government pro-
posals, many businessmen apparently believe Rajiv will make whatever policy
changes they themselves would recommend. The general air of optimism is tem-
pered, however, by concern that Rajiv may attempt too much too soon, and that
bureaucratic resistance and political expediency will curtail the drive for ef-
ficiency.
Implications for the US
Rajiv's fascination with high technology will probably sustain the recent
trend toward increased-cooperation between Indian and foreign business firms and
may open new opportunities for business links with US firms. If Indian access
to desired technology is frustrated by US export controls, however, the push for
technology will add to strains in bilateral relations. Moreover, the emphasis on
improving the technical competence of Indian firms -- on absorbing, not just im-
porting, technology -- probably means that some restrictions on imports of so-
phisticated equipment will continue.
So far, Rajiv has not complained about US policies toward Indian borrowing
from the Asian Development Bank and other multilateral lending institutions.
However, he has retained key bureaucrats who in the past have complained about
the politicization of foreign aid, although some have been shifted to different
positions. When advising Rajiv, they will probably emphasize the relationship
-of reduced foreign lending to forthcoming balance-of-payments strains. 25X1
Near-term Decisions
We are likely to see several key policy announcements within the next sev-
eral months:
o Rajiv has directed that concrete steps to improve exports be taken within
the next few weeks.
o Policies.and programs for the Seventh Plan, which begins in April and is
already overdue, will be reviewed during the ''weeks ahead.''
o Proposals for reform of the public sector are already under consideration.
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o Two ministries have been asked to prepare specific proposals to improve
productivity, absorb technology, and use capacity more fully.
The central government budget is usually presented at the end of February.
This could provide information about tariff protection for domestic indus-
tries and subsidies for the public sector.
o The annual trade policy, usually presented in April, will reflect any
changes in import licensing controls and in export promotion efforts not
already evident in the government budget.
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SUBJECT: INDIA: Rajiv Gandhi's Economic Policies--
Early Signposts
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DDI/NESA/S0/S
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DDI Registry
NI0/NESA
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C/SO/D/NESA
C/SO/S/NESA
DDO/NED
CPAS/ILS
PDB Staff
CPAS/IMD/CB
NESA/PS
NESA/SO/S/Branch
(30 Jan 85)
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SECRET
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Consul General
American Consulate General
Bombay
SUBJECT: INDIA: Rajiv Gandhi's Economic Policies--
Early Signposts
External Distribution:
Jeffery Johnson
IEP/ANFSA/OSA
Department of Commerce
Room 2029B
Economic Counselor
American Embassy
New Delhi
Robert Beckman
ASIA/BI
Agency for International Development
Room 3319
Steve Bloggett
NEA/INS
Department of State
Room 5251
Dennis Murphy
INR/EC
Department of State
Room 8662
Eliza van Hollen
INR/NESA/SOA
Department of State
Room 4524 A
Maurice Landes
ERS/IED
Department of Agriculture
(GHI Building)
Margaret Herdeck
Loan Officer for India
Overseas Private Investment Corporation
John Weeks
IDN/OASIA/IBN
Department of the Treasury
Room 5221
Russell Price
Desk Officer for India
Export-Import Bank of the United States
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