Fragile experiment in free enterprise

A Brahman in India once asked village farmers each to donate a small pot of milk to a community vat for the poor. One by one, each farmer brought a pot to the village temple. But one by one, each thought in private that no one would notice if water was substituted for milk. When the Brahman checked the vat, it was full of water.

This ancient Indian tale, as told recently by a Bombay industrialist, reflects a dawning perception in the world's largest democracy: that the 35 years under a ''socialist pattern of society'' since independence have failed to achieve rapid growth or a measurable reduction in the number of poor people, and that the time has come for expanding free enterprise.

Prime Minister Indira Gandhi's trip to the United States, a pinnacle of free-market ideas, represents India's new overture to the West to help boost its private sector with Western technology and investment.

India, with three times the population of the US, one-third of its land, and one-fiftieth of its income, is seeking a new ''interdependence'' with the West.

This new leniency toward capitalism has been a quiet theme in India since Mrs. Gandhi's return to power in 1980. She has gradually but dramatically unwound the cloak of industrial controls and protections from the country's private enterprises. ''The government now realizes that regulations and a closed economy can hinder growth and produce their own evils,'' says India's Reserve Bank governor, I. G. Patel.

Last year, for instance, five times as may licenses for new industrial capacity were granted as in the previous year. New import policies opened a wave of foreign goods, mainly for heavy industries and export-oriented companies. Prices were lifted on basic commodities, such as steel and cement, and the number of foreign collaborations in the past two years almost equals the number of the previous seven years. ''It's as if a woman who has lived under a veil for 35 years suddenly was asked to go to a disco,'' says Dr. Fredie Mehta of Tata Industries.

This creeping capitalism, or ''liberalization'' and ''pragmatism,'' as it is called, remains a fragile experiment, however. Officials speak of the need to unleash the private sector and restrain the large public companies, but they are concerned.Even though the semisocialist and ''self-reliance'' policies have helped India achieve the high status as the 12th-largest industrial nation in the world, it nonetheless remains the 15th-poorest country in per capita income, with a growth rate below that of most other Asian nations, including China.

Income inequities have not been lessened, and an estimated 48 percent of the nation's 700 million people still live under the poverty line.

If liberalization succeeds in breaking India out of its historic average 3.65 percent growth in gross domestic product, then the new policies may remain a permanent fixture on ''eternal India.'' But if opposition parties can cite excessive profitmaking, or if the nation is hit by several weak monsoons, then Mrs. Gandhi may be forced to withdraw her support for this guided capitalism before the 1985 parliamentary elections.

''The critics of liberalization may get the last laugh yet,'' states L. K. Jha, chairman of an economic reforms commission.

From the left come criticisms of the government's aiding the rich. ''Liberalization will backfire,'' says Prof. S. K. Goyal of the Indian Institute of Public Administration. ''The contrasts in wealth will get sharper. Either the poor people will vote out Mrs. Gandhi, or the party will restrict democratic rights.'' Leftists also charge that the ruling party merely loosened controls on business so that it could collect larger - and illegal - contributions from industry to finance expensive political campaigns.

Rightist charges center on India's agreement last year for a four-year, $5.7 billion (US) loan from the International Monetary Fund (IMF). The loan's conditions call for increased imports and a freer climate for the economy. But fear of multinational companies, left over from memories of the British East India Company, and reluctance to let go of a protected environment have caused some industrialists to complain of the imports under liberalization.

One indication of India's previous isolation from world competition is the absence of a recession until just a few months ago, when credit policies had successfully squeezed high inflation down to near-zero rates of growth.

There is an almost universal desire in India to avoid the problems of industrialization seen in the West. ''The industrial societies of the West went through blood, sweat, and tears,'' says Mohammad Fazal of the government's planning commission. ''We want to achieve an industrial society with humanism.'' In one category, India has achieved success: The distribution of new indutries throughout the country has helped prevent rapid urbanization. Only 23 percent of the population lives in or near cities, compared with 17 percent two decades ago.

Since the 1950s, India has boosted its grain production from 36 million metric tons a year to over 130 million. Its savings rate as a percentage of gross domestic product has reached 24 percent from 5 percent, which compares favorably with most Asian nations. And in most basic goods, such as steel and trucks, it has nearly achieved the desired goal of self-sufficiency.

The industrial strength of India, including its own nuclear power plants and space program, surprises many outsiders, whose impressions of India as full of snake charmers, gurus, and poor people, may have hindered its relations with the West. In quantity, India claims the third-largest group of technicians, engineers, and scientists behind the US and the Soviet Union (although Japan may be able to lay claim to being third by now).

If anything has thrown India off course, it has been its unexpected population growth, its ''invisible cage'' of the Hindu caste system, and its foreign exchange crises.

* Last year's census shocked the government planners. Family planning programs and rural development had hardly slowed down the rise in population, which stood at 683 million over a year ago and is rising about 2 percent a year. By the mid-21st century, India could surpass China as the world's most populous nation. ''No matter what the size of the cake, there are more people to eat it, '' says Mr. Fazal. New approaches and a new push have been placed on family planning by Mrs. Gandhi.Fortunately, the ''green revolution'' in rice and wheat in several Indian states has kept food grain production growing faster than population, 2.7 percent vs. 2 percent, leaving India nearly self-sufficient in grains.

* The dream of India's first prime minister, Jawaharlal Nehru, that industrialization would force the differing castes in the predominantly Hindu nation to ''rub shoulders'' has not been realized.

Communal strife is still common, and the 1 in 7 Indians who are ''untouchable ,'' or Harijans (''children of God''), as Mohandas (Mahatma) Gandhi called them, still have yet to adequatelyshare in the economic growth. Even on the stock exchanges, one caste often gangs up on another to suppress certain companies' share prices. ''The Hindu view of rebirth fits neatly into a pattern of mental escape in which one awaits another life for correction of the miseries one suffers now,'' an Indian Institute of Public Opinion report says.

* During the late 1950s, a foreign exchange crisis brought in many of the industrial controls that are now being loosened. Imports were restricted, and private business was directed by licensing into areas that would make India self-sufficient. Another crisis in 1966 brought devaluation of the rupee, India's currency, and a wave of 19th-century-style socialism against large, family-owned industries and the multinational companies. In 1974, however, when all other oil-importing nations were hit with exchange problems, India was fortunate enough to have many of its workers head to jobs in the Middle East, sending back money that kept India out of the foreign exchange soup.

It was not so fortunate in 1979, when the next oil price increase came along. India's own oil sources in the state of Assam were shut down by violence; the remittances from Indians abroad did not increase fast enough; a severe drought hit agriculture; and the nation's coal, rail, power, and steel infrastructure almost collapsed.

On top of that, international aid began to shrink. India's share of World Bank soft loans, once 40 percent, is being reduced along with the loans themselves, as China begins to tap the bank.

To keep the economy rolling, India opened industries to more competition, both from within and from imports; obtained the $5.7 billion (US) IMF loan; launched a 20-year, $40 billion petroleum exploration program (even accepting international bidders); and actively sought collaborations with foreign companies to obtain the technology needed to make its exports competitive in world trade.

All these steps are just beginning to bear fruit. But the nation's foreign exchange reserves continue to drop - 27 percent last year. Better management of rail, power, and coal facilities has been gained for the time being, and domestic oil production has increased 50 percent. Mrs. Gandhi declared 1982 as the ''year of productivity'' (a long way from her 1971 campaign slogan of ''remove poverty'').

''The economy has been brought back on the rail,'' says Finance Minister Pranab Mukherjee, who says the 3.6 percent growth rate may now rise to 5 to 7 percent a year. India has begun to borrow on commercial markets for specific projects, and it still plans to spend $191 billion on public and private projects in the current, sixth five-year plan (1981-86).

It is a delicate experiment for India in the next few years. If oil exploration fails, if the monsoons fail, if exports do not rise above past levels, and if world oil prices go up, the trend to free enterprise may be reversed. On the other side, free markets can create income disparities and raise expectations beyond what can be met.

''Without adequate development,'' Mr. Mukherjee says, ''the discontent and tensions will endanger the very basis of democracy in India.''

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