INDIA: TECHNOLOGY AND PRODUCTIVITY--GANDHI'S POLICY THEMES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000406220001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: December 2, 2009
• Sequence Number: 1
• Publication Date: April 25, 1985
• Content Type: REPORT

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Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
25 April 1985
India: Technology and Productivity -- Gandhi's Policy Themes
Summary
Prime Minister Rajiv Gandhi's interests in technology and produc-
tivity have revived economic liberalization efforts that began under
Indira Gandhi but stalled during the past two years. His moves to
ease government restrictions on private production and investment are
so significant by Indian standards that press reports describe Indian
businessmen as ''drunk with euphoria." His more cautious approach to
changes in foreign trade policy probably reflects concern about forth-
coming balance-of-payments strains as well as a-continuing emphasis on
self-reliance. Gandhi still intends the government to retain control
of the economy but believes that less bureaucratic meddling and more
competition in the private sector will spur modernization, limit cor-
ruption, and ease strains on the budget. Gandhi's economic reforms
open new opportunities for ties with Western business.
This memorandum was prepared byl (Office of Near Eastern and South 25X1
Asian Analysis. Information available as of 19 April 1985 was used in its prep-
aration. Comments and queries are welcome and may be directed to the Chief,
Subcontinent Branch, South Asia Division, NESA, 25X1
NESA M 85-10085
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Since independence, Indian policymakers have regulated the economy through
an extensive system of direct controls as well as a full range of macroeconomic
policies. Even though a multitude of minor policy adjustments since 1980 has
loosened bureaucratic bottlenecks, Rajiv inherited policies that protect most
Indian businessmen from foreign and domestic competition and require them to
seek government permission before increasing output beyond authorized ceilings.
After Indira Gandhi was assassinated last fall, Indian businessmen enthusiasti-
cally anticipated further reforms from a,young Prime Minister with technical
training and a computer hobby. Rajiv Gandhi's initial moves have fueled an un-
precedented atmosphere of optimism among corporate leaders.
o ''Improvement in productivity, absorption of modern technology, and
fuller utilization of capacity must acquire the status of a national
campaign."
o ''We don't want controls, we want control (of the direction of the econ~
omy)...Controls lead to all the corruption, to all the delays.''
o To businessmen: The ''problem will not be with government con-
straints...this government (will be) moving faster than you.''
Rajiv Gandhi
Benefits for Private Industry
The new emphasis on technology and productivity is reflected in significant
relaxation of government restrictions on private industry:
o Except for large industrial groups and foreign companies, licenses are no
longer needed to establish or expand capacity outside of big cities in 25
industries including machine tools, automobile parts, scientific instru-
ments, and some electronic components.
o Manufacturers of motor vehicles, paper products and some types of machinery
and electronic goods may now vary their product mix within broad categories
-- manufacture automobiles instead of trucks, for example. They must still
seek government permission before investing in any additional capacity.
o Anti-monopoly legislation, which imposes additional restrictions on produc-
tion and investment, will now apply to only about 800 corporations, com-
pared with more than 3000 in 1984.
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o Small firms may now triple their sales and almost double their investment
without losing tax exemptions or becoming subject to the industrial licens-
ing system.
o The government department that supervises private corporations has been
shifted from the Ministry of Law and Justice to the Ministry of Industries,
whose bureaucratic bias favors production rather than restraint.
Businessmen also will benefit from a substantial reduction in corporate and
personal tax rates and lower import duties on some machinery imports. According
to press reports, businessmen are especially pleased that the government is be-
ginning to plan tax policies for several years ahead. Still, the new budget ap-
proach combines cuts in business deductions with the lower tax rates; fiscal in-
centives will also be partially offset by other budget proposals that raise
prices of essential items such as petroleum products and rail services, increase
excise taxes on many manufactured goods, and restrict government loans to poorly
managed or nonessential private corporations.
The electronics industry is a major beneficiary of tax and control conces-
sions. Production licenses will be issued far more freely than before, even to
large companies and for consumer goods previously viewed as nonessential luxu-
ries. Ceilings on output of micro and mini computers have been eliminated and
import duty on components has been greatly reduced while high tariffs still pro-
tect domestic computer manufacturers. Development of mainframe computers and
some high technology products will continue to be a government monopoly. F 125X1
o ''Another turning point has arrived with... microelectronics and comput-
ers. In the earlier (industrial) revolutions, whoever got left behind
found it extremely difficult to catch up...we must see that we are not
left (behind).''
o In '' basic scientific research we have achieved a lot. But we have
been slow and not very good in transforming this into actual produc-
tion.''
Rajiv Gandhi
Economic reform will hurt some businesssmen and workers, however. The Fi-
nance Minister has warned that the era of unbridled protection is over and the
private sector should prepare for a-''bone breaking phase of development.'' Gan-
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dhi has commented that he would not be adverse to a shift from labor-intensive
to capital-intensive industry -- a radical statement for an Indian leader, and
one that was barely tempered by the proviso that workers be educated for other
employment.
Technology Emphasis in Foreign Trade and Investment
Indian policy statements promise easy access to imported technology, espe-
cially for electronics and export industries, and procedures for employing for-
eign technicians have been simplified. New Delhi has even emphasized that for-
eign equity investment -- previously tolerated but not encouraged -- will be
allowed in electronics and oil exploration.
Import licensing changes have been relatively cautious, however, combining
liberalization to promote modernization and exports with safeguards for domestic
manufacturers. New Delhi has removed restric- 25X1
tions on some industrial machinery used by exporters and high technology indus-
tries, but also tightened controls on additional items that compete with Indian
production. Trade guidelines have been announced for the next three years so
that businessmen can plan ahead. 25X1
Many export industries, particularly computer software, will benefit from
liberalized import controls, lower import duty, and simplified procedures, but
Gandhi apparently is relying primarily on improvement in overall industrial per-
formance to make Indian exports more competitive in world markets. Other export
promotion initiatives are surprisingly few in view of the emphasis Gandhi's eco-
nomic advisers have placed on the need to earn more foreign exchange. Press re-
ports suggest that new income tax concessions on reinvested export profits pro-
vide little additional incentive since: (1) they replace previous benefits
linked to export sales and (2) they are no longer available for trade with the
Soviet Union. A routine adjustment to world market conditions removes export
taxes on several mineral and agricultural products.
Indian economic policy still stresses self-reliance. Government approval
is necessary before an Indian firm may purchase or lease foreign technology,
even in industries recently exempted from industrial licensing restrictions, and
domestic manufacturers are still required to reduce gradually their use of im-
ported parts. They are also expected to develop their own research skills. New
Delhi remains reluctant to open the Indian market to foreign investors who can-
not contribute technology or promote Indian exports.
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technologies...we have to pick a few areas to come on par with the ad-
vanced countries."
o ''We want a new dynamism in our economy, but we cannot do it entirely o
our own....We need help from foreign business to help us build self-suf
ficiency. "
o ''It is not feasible to open up industry completely to free competition
from other countries. It would not be fair to our industries.''
o On the role of foreign companies in India: ''We see them...in the high
technology areas which we cannot develop ourselves.''
Rajiv Gandhi
Government Still in Driver's Seat
Gandhi clearly intends the government to retain control of the direction of
the economy. While easing detailed regulations, he has retained the basic
structure of import and industrial licensing, preferences for small producers,
and close supervision of large corporate groups. He has even tightened controls
in a few areas -- on pollution, for example, following the Bhopal disaster.
Gandhi, while actively using policy tools -- which include selective liberaliza-
tion -- to support his personal predilection for electronics and high technolo-
gy, apparently has no plans to rely on market forces to allocate basic consumer
goods and will continue the public distribution system that supplies grain to
urban consumers and supports prices farmers receive for wheat and rice.
Gandhi hopes to make the bureaucracy more efficient, not less important.
Within his own secretariat, he has increased the number of senior civil servants
who will help shape economy policy. Gandhi has repeatedly emphasized decentral-
ization of decisionmaking so that public sector corporations can make business
decisions without interference from government ministries. Indian industrial-
ists report that bureaucratic approvals for private projects can be obtained
more quickly than in the past -- perhaps because Gandhi has ordered that no file
be reviewed more than twice.
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o On reform within the bureaucracy: ''Rules and procedures will be dras-
tically simplified to speed up decisionmaking. Results will take prece+
dence over procedures... .A strong concern for efficiency must permeate
all institutions.11
- Rajiv Gandhi
Gandhi's concern for bureaucratic efficiency -- and government revenues --
has also prompted an anti-corruption drive since he came to power. Many busi-
ness enterprises were raided during the state election campaign to obtain infor-
mation about smuggling and illegal payoffs; rewards for information about smug-
gling have been increased; and corporate contributions to political parties are
once again legal. According to press reports, some businessmen were surprised
to discover that payoffs could no longer influence excise tax policy.
Gandhi's main approach to convert unreported earnings into taxable income
is to lower tax rates and relax some of the controls that led businessmen to
conceal part of their production and income. Many Indian journalists remain
skeptical of Gandhi's ''Mr. Clean'' image, however, and question whether he will
forgo payoffs on large contracts that help fund the Congress Party.
Economic Policy Still Evolving
The strength of Gandhi's resolve to create a more competitive economic en-
vironment is yet to be tested. Despite his hints that some hardship is an ac-
ceptable price for efficiency, Gandhi has retained substantial protection
against imports and may slow the pace of domestic decontrol if unemployment
mounts or business confidence weakens. In addition, his liberalization program
will be put to a severe test if, as promised, he decentralizes implementation,
since India's bureaucrats are notoriously cautious and jealous of their authori- 25X1
Y-
Policy statements expected during the next several months will help define
Gandhi's commitment to economic liberalization. Press reports suggest that a
revised industrial policy will focus on chronically unprofitable firms in both
the public and private sectors, and may modify regulations that limit industrial
expansion in urban areas and subsidize investment in 'no industry' districts.
Gandhi assured a meeting of.international business leaders that he will ease
foreign investment rules further. Details of the next Five Year Plan and of ag-
ricultural. policy, scheduled for release by July, will clarify government in-
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vestment and welfare plans. Reforms in education -- one of Gandhi's ecial
interests -- will not be proposed until next year. s 25X1
Economic and Political Impact
Gandhi's policy reforms and his pro-business image do not assure faster
overall growth. His decontrol moves directly affect only a small share of the
Indian economy --primarily exporters and corporations that produce capital
equipment and consumer durables. Even if liberalization is extended substan-
tially, substantial overall growth can be realized only if shortages of elec-
tricity become less severe and agricultural output increases sufficiently to
sustain domestic demand for manufactured goods. Perhaps most important, forth-
coming balance-of-payments strains may block India's ability to import goods
needed to modernize and increase production.
Balance-of-Payments Constraint
In our view, there are several factors pointing to increasing bal-
ance-of-payments strains that could jeopardize India's ability to become
more productive and efficient. Although international financial reserves
are now adequate -- about $6 billion, equivalent to four to five months
imports at the 1984/85 rate -- expansion of the domestic economy would re-
quire a much faster growth in-the volume of imported petroleum and capital
goods. Scheduled payments to the International Monetary Fund and military
suppliers will mount sharply within the next two years. Wary of falling
into a debt trap, Gandhi and his economic advisers are reluctant to risk a
substantial increase in commercial borrowing to finance imports. We see a
less than even chance for discovery of additional petroleum deposits, rap-
id export growth, or improved foreign aid prospects, which would provide a
more favorable balance-of-payments scenario.
Mounting criticism that Gandhi is slighting the poor in favoring India's
small middle class may emerge as a significant political issue. Large cuts in
taxes on personal income, wealth, and inheritance directly affect less than
three percent of the population; indirect tax hikes and the large budget deficit
threaten inflation that will affect most people's pocketbooks. Moreover, few
will be able to afford products from the new boom sectors -- automobiles and
electronic goods. Central government spending on welfare and rural development
programs is stagnating. Although Gandhi says that reducing poverty is his pri-
mary objective, his enthusiasm lies with middle class issues.
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Implications for the United States
Gandhi's economic approach will accelerate interest in business ties with
the United States. A window of opportunity has been opened for US trade and in-
vestment. It may last only two years or so, however, until balance-of-payments
strains mount and domestic producers clamor for protection while they assimilate
recently acquired foreign technology.
At the same time, the potential for trilateral misunderstanding and friction
is high. Gandhi and his new team of economic advisers bring with them a belief
that the United States is an unreliable supplier. Their new sense of urgency
about modernization suggests they will turn to Japanese or European suppliers
promptly if US export controls remain a significant trade barrier despite recent
negotiation of a memorandum of understanding with the United States on technolo-
gy transfer.
Indian officials already contend that economic liberalization, which the
United States has encouraged, can continue only if concessional aid receipts re-
main high. If balance-of-payments strains limit India's ability to modernize,
they will probably blame the United States for limiting Indian borrowing from
multilateral lending institutions.
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SUBJECT: India: Technology and Productivity -- Gandhi's Policy Themes
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SUBJECT: India: Technology and Productivity -- Gandhi's Policy Themes 25X1
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SUBJECT: India: Technology and Productivity -- Gandhi's Policy Themes
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