India's Needs Go Beyond Short-Term Credit Relief

MEASURED by sheer impact on a large number of human beings, India's less-reported crisis rivals the flux in central Europe, the Soviet Union, or Africa. Like the imperiled governments in those places, India's rulers are now pleading for generous aid to overcome mostly self-inflicted injuries. The West should agree, but only if new aid is coupled to much tougher conditions on defense spending and progress on regional cooperation in South Asia.Outside banking circles, few realize how close India came this year to a payments default. Delhi's foreign reserves had dropped to a level barely adequate to cover one week's imports; at one point, the Bank of England flew a consignment of India's gold to London as collateral for further credit. Foreign-exchange reserves have grown only slightly since then, but now yet another reform package is in place. Indian Prime Minister P. V. Narashimha Rao is promising substantial economic liberalization. Since the June election, Mr. Rao's government has moved to lift restrictions on foreign investment. In return for these belated moves, India has won new aid to bolster its perilous payments position. Pledges totaling $6.7 billion were made at a donors' meeting in Paris on Sept. 19 and 20. Individual governments pledged $2.2 billion, with the largest donations coming from Japan, Germany, and Britain; the Asian Development Bank and the World Bank will provide most of the balance. In addition, the International Monetary Fund (IMF) will almost certainly approve another $1.8 billion in credits. As emergency relief, all this is fine. No one should want to see India beggared by its problems. The aid, which is 6 percent more than the amount pledged last year, helps Delhi avoid tougher import controls necessary to head off a loan-payments default and provides time to deliver promised cuts in the government deficit. As a serious effort by India's friends to alter the course of India's policies, however, the new aid looks like a Band-Aid. In return for the reprieve granted at Paris, Western generosity should be matched by tougher conditions. These days commercial capital, let alone concessionary finance, is getting scarce. Applied to India, the IMF's traditional economic and budgetary conditionality seems faint-hearted. In Pakistan, Sri Lanka, and Bangladesh, as well as in India, military spending, poor governance, a deteriorating environment, and relentless population growth have imposed crushing burdens that have as much to do with the region's poverty as budgetary mismanagement. The world's longest cold war, between India and Pakistan, continues, carrying with it a risk of catastrophic confrontation if the combatants choose to use their small hoard of nuclear weapons. Throughout South Asia, trade liberalization, frontier transit, river and flood control, or joint hydro-electric projects are all hostage, after 40 years, to sterile and unimaginative politics. To be sure, aggression and suspicion cloud the smaller South Asian countries. But India's size and influence in South Asia, where one of every four human beings now lives, means that any push to free this clogged agenda must come from Delhi. India's creditors have every right to nudge Delhi into taking the lead. Tighter strings on Western credits should tie India's stark financing needs to a wider, and urgent, national and regional agenda. A recent US Congressional Research Service report notes, "Established trends and fiscal and economic realities probably will compel India to seek strengthened ties to the Western countries and Japan, the IMF and World Bank." Indeed, India has no choice. Without the IMF and World Bank, it cannot match its external financing needs. Given that necessity, an Indian reform program imposing enlightened conditionality could promote a far wider agenda than mere promises of balanced budgets or internal liberalization (though these are important). A wider conditionality, imposed without humiliating publicity, could also promote a modest, pan-regional agenda: hydro-power generation, environmental control, and a moderation of South Asia's arms race. Other conditions should aim to force reductions in defense spending, to win accession to the Nuclear Nonproliferation Treaty, and to reduce Himalayan deforestation. No one should underestimate the challenges facing India's rulers: caste conflict, violent ethnic separatism, rapidly rising inflation, religious intolerance, political assassination, and deteriorating standards of governance at all levels of authority. But we should not ignore as well the deep paralysis and ingrained arrogance of Indian policymaking. Our habitual Western reticence, mindful of India's prickly sensibilities, must give way to a willingness to use to best effect the aid so badly needed. India deserves our sympathy; in the right circumstances it may also deserve our money.