India. Country Profile 2006

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1 Country Profile 2006 India This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast. The full publishing schedule for Country Profiles is now available on our website at The Economist Intelligence Unit 26 Red Lion Square, London WC1R 4HQ United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) newyork@eiu.com Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2006 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables "n/a" means not available; " " means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

3 AFGHANISTAN TAJIKISTAN PAKISTAN RAJASTHAN Bhuj Rann of Kachchh GUJARAT Gandhidham Gulf of Kachch h Porbandar Veraval Arabian Sea Rajkot Bhavnagar Mumbai (Bombay) Bikaner Jodhpur Gulf of Khambhat 5 Udaipur Madgaon GOA 7 Amritsar Ludhiana Jalandhar Chandigarh PUNJAB 3 Dehra Dun Saharanpur 6 16 Meerut NEW DELHI Moradabad Ahmadabad Surat 4 ter n We s Kolhapur Srinagar ar Jammu Sikar Vadodara Jaipur Ajmer Nasik MAHARASHTRA Pune Line Tapi R. of Under Chinese control Kargil Leh 8 Control Aligarh Shahjahanpur Agra UTTAR PRADESH Etawah Lucknow Gwalior Kanpur Jhansi Allahabad Kota INDIA MADHYA PRADESH Bhopal Indore R. Narmada Khandwa Akola Aurangabad Nanded Nizamabad Yamuna R. Murwara Jabalpur Bilaspur SRI LANKA NEPAL Nagpur Raipur CHHATTISGARH Chandrapur ORISSA Mangalore KARNATAKA Bangalore Chennai (Madras) Mysore TAMIL NADU Puduchcheri (Pondicherry) 13 Salem Kozhikode 13 Laccadive (Calicut) Coimbatore Islands Nagappattinam KERALA LAKSHADWEEP Kochi (Cochin) Madurai Kollam (Quilon) Tuticorin Gulf of Thiruvananthapuram Mannar (Trivandrum) Nagercoil CHINA Solapur Vizagapatam (Vishakhapatnam) Gulbarga Hyderabad Cocanada (Kakinada) Vijayawada 13 Raichur Machilipatnam Belgaum Kurnool Hubli ANDHRA PRADESH Chitradurga Nellore ts a h G D e c c Kris hn R. a n a Ganga R. E a s t e r n Ghats Godav ari R. Palk Strait Dibrugarh 14 BHUTAN Darjiling Itanagar North Lakhimpur Gorakhpur Shiliguri 2 12 Goalpara Guwahati BIHAR Patna Shillong Kohima 10 Varanasi Bhagalpur Imphal Gaya BANGLADESH 9 Baharampur 15 JHARKHAND Dhanbad Agartala Aizawl 11 Ranchi Barddhamandhaman 17 Jamshedpur Kolkata Kharagpur (Calcutta) MYANMAR R. Ghaghara Son R. 1 ARUNACHAL PRADESH 2 ASSAM 3 CHANDIGARH 4 DADRA AND NAGAR HAVELI 5 DAMAN AND DIU 6 HARYANA 7 HIMACHAL PRADESH 8 JAMMU AND KASHMIR 9 MANIPUR 10 MEGHALAYA 11 MIZORAM 12 NAGALAND 13 PONDICHERRY 14 SIKKIM 15 TRIPURA 16 UTTARANCHAL 17 WEST BENGAL Sambalpur Mahanadi R. Cuttack Puri Brahmapur Vizianagaram Baleshwar Bay of Bengal Main railway Main road International boundary Province boundary Main airport Capital Major town Other town August 2006 Brahmaputra R. 1 Andaman Islands ANDAMAN AND NICOBAR ISLANDS Port Blair Nicobar Islands 0 km INDIAN OCEAN 0 miles The Economist Intelligence Unit Limited 2006

4 Comparative economic indicators, 2005 Gross domestic product (US$ bn) Gross domestic product per head (US$ '000) India Singapore 26.9 Indonesia Indonesia Singapore Sri Lanka Pakistan India Bangladesh Pakistan Vietnam Vietnam Sri Lanka Bangladesh Afghanistan Afghanistan Sources: Economist Intelligence Unit estimates; national sources Sources: Economist Intelligence Unit estimates; national sources. Gross domestic product (% change, year on year) Consumer prices (% change, year on year) Afghanistan Sri Lanka India Afghanistan Vietnam Indonesia Pakistan Pakistan Singapore Vietnam Sri Lanka Bangladesh Indonesia India Bangladesh Sources: Economist Intelligence Unit estimates; national sources. Singapore Sources: Economist Intelligence Unit estimates; national sources. Country Profile The Economist Intelligence Unit Limited 2006

5 India 1 Contents India 3 Basic data 4 Politics 4 Political background 5 Recent political developments 9 Constitution, institutions and administration 11 Political forces 15 International relations and defence 22 Resources and infrastructure 22 Population 23 Education 24 Health 25 Natural resources and the environment 26 Transport, communications and the Internet 29 Energy provision 31 The economy 31 Economic structure 33 Economic policy 35 Economic performance 38 Regional trends 38 Economic sectors 38 Agriculture 40 Mining and semi-processing 41 Manufacturing 43 Construction 44 Financial services 45 Other services 46 The external sector 46 Trade in goods 47 Invisibles and the current account 48 Capital flows and foreign debt 49 Foreign reserves and the exchange rate 51 Regional overview 51 Membership of organisations 53 Appendices 53 Sources of information 55 Reference tables 55 Population statistics 55 Transport statistics 55 Energy statistics 56 Government finances The Economist Intelligence Unit Limited Country Profile 2006

6 2 India 56 Gross domestic product 57 Nominal gross domestic product by expenditure 57 Real gross domestic product by expenditure 58 Gross domestic product by sector, at constant prices 58 Money supply 58 Interest rates 58 Prices and earnings 59 Agricultural production 59 Mineral production 60 Industrial production 60 Gross domestic savings 60 Stockmarket indicators 61 Main composition of trade 61 Main trading partners 62 Balance of payments, IMF series 63 External debt, World Bank series 63 Foreign reserves 63 Exchange rates Country Profile The Economist Intelligence Unit Limited 2006

7 India 3 India Basic data Land area Population Main towns Climate Weather in New Delhi (altitude 218 metres) Languages Religion Measures Currency Fiscal year Time Public holidays 3,287,263 sq km (including Indian-administered Kashmir); 57% is agricultural land and 16% forest area 1.087bn (mid-2004) Population in millions, 2001 census Mumbai (Bombay) 16.4 Kolkata (Calcutta) 13.2 Delhi 12.8 Chennai (Madras) 6.4 Bangalore 5.7 Hyderabad 5.5 Varied; humid subtropical in Ganges basin, semi-arid in the north-west, tropical humid in north-east and most of the peninsula, tundra in the Himalayas; all areas receive rain from the south-west monsoon in June-September; the south is also served by the north-east monsoon in January-March Hottest month, May, C (average daily minimum and maximum); coldest month, January, 7-21 C; driest month, November, 4 mm average rainfall; wettest month, July, 180 mm average rainfall Hindi is the national language and primary tongue of 30% of the population. There are 14 other official languages: Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi and Sanskrit. English is widespread in business circles and as a second language Hindu (80.5% in 2001 census); Muslim (13.4%); Christian (2.3%); Sikh (1.9%); Buddhist (0.8%); Jain (0.4%) Metric system. Numbers are often written in lakhs (100,000) and crores (10m) Rupee (Rs)=100 paise. Average exchange rate in 2005: Rs44.10:US$1. Exchange rate on July 31st 2006: Rs46.80:US$1 April 1st-March 31st 5 hours 30 minutes ahead of GMT January 26th; August 15th; October 2nd; also major Hindu, Muslim, Christian and other religious holidays The Economist Intelligence Unit Limited Country Profile 2006

8 4 India Politics India is a parliamentary federal democracy with an indirectly elected president, currently Abdul Kalam. The prime minister, Manmohan Singh, leads the United Progressive Alliance (UPA), a coalition dominated by the Congress party, which fell short of a majority in the May 2004 general election. The minority UPA government is currently being supported by the Left Front, a group of left-wing parties dominated by the Communist Party of India (Marxist). Political background Early history Independence and dominance of Congress The urban Indus civilisation flourished in west and north-west India around 5,000 years ago. India was a major exporter of textiles and spices and traded with Arabia, Egypt, Rome, south-east Asia and China. Migrants and invaders from central and western Asia have entered India many times since, if not before, Alexander the Great did so in the 4th century BC. As a result India, the world's second-largest country by population and sixth-largest in terms of area, exhibits a great diversity of people, religions and culture. In 1526 a central Asian warrior, Babur, invaded India and established the Mughal empire. After Vasco Da Gama discovered the sea route to India via the Cape of Good Hope in 1498, a series of European chartered companies Portuguese, British, Dutch, French and Danish set up trading posts and colonies in India. The British East India Company eventually dominated, and in 1757 the Mughal emperor granted it the right to administer Bengal. By then the Mughal dynasty was in decline and the Marathas from the west had become the dominant power. After the East India Company defeated the Marathas in 1818, it had no military rival. Following a major Indian revolt in 1857, the East India Company deposed the last Mughal emperor, Bahadur Shah. Within months its charter to trade with India was abrogated by the British government, which annexed the Company's Indian territories, and India became a fully-fledged British colony. British rule in India ended in 1947 after a sustained campaign for independence, led by the Indian National Congress (Congress). British India was partitioned, amid great bloodshed, to create Muslim-majority Pakistan and the secular state of India. India's first prime minister was the Congress leader, Jawaharlal Nehru. Under his government, India established a complex system of socialist economic controls that remained in place until the 1980s. Congress and its successor Congress (Indira), or Congress (I), named after Nehru's daughter, Indira Gandhi, who became prime minister in 1966 dominated politics in India until the 1990s. Indira Gandhi's administration continued to implement an inward-looking economic policy and adopted increasingly authoritarian measures. In 1975 she declared a state of emergency that lasted for two years. Civil rights were suspended, the press was controlled, many of her critics were imprisoned and her son, Sanjay, began an unpopular mass-sterilisation programme to stem population growth. In the 1977 general election voters rejected Mrs Gandhi. Her party was defeated and she lost her seat. Country Profile The Economist Intelligence Unit Limited 2006

9 India 5 Having returned as prime minister in 1980, Mrs Gandhi tacitly supported a violent movement against the Akali Dal, the ruling Sikh party in Punjab. However, the violence became uncontrollable and she finally ordered the army to storm the Golden Temple, the prime Sikh shrine in Amritsar, and kill the terrorists' leader. In retaliation, in 1984 she was assassinated by her Sikh bodyguards, and her elder son, Rajiv Gandhi, succeeded her as prime minister. In a sympathy vote he won an unprecedented majority in an election later that year, and his administration began to take cautious steps towards economic liberalisation. However, Congress lost its majority in the 1989 general election amid a series of corruption scandals, and Mr Gandhi stepped down. He was assassinated by a Sri Lankan Tamil extremist during the 1991 election campaign. The age of coalition politics Following the 1991 general election Congress formed a minority government under Narasimha Rao, which initiated a series of economic reforms that set India on a path of stronger economic growth. The May 1996 election returned another hung parliament. The Hindu-nationalist Bharatiya Janata Party (BJP) formed a government that lasted just 13 days; this was followed by a leftleaning United Front (UF) coalition, which was supported from the backbenches by Congress. The UF government continued to implement the economic reforms begun under Congress, but when Congress withdrew its support in November 1997, the government fell. A general election held in February-March 1998 produced yet another hung parliament. The BJP finally formed a governing coalition, the National Democratic Alliance (NDA), with 22 other parties under the leadership of Atal Behari Vajpayee, a moderate. In April 1999 the NDA government collapsed after narrowly losing a vote of confidence. It remained as a caretaker administration for six months before re-establishing itself in power following a general election held in September- October The alliance of more than 20 parties included a number of smaller regional and caste-base parties, which exercised disproportionate influence in government, often holding the administration to ransom to gain concessions in their home states. Coalition governance has become a continuing feature of Indian politics at the federal level, and increasingly also at the state level, since On both levels it seems that coalition governments have found it hard to push through policies, particularly those requiring legislative action. Recent political developments The BJP leads a coalition government from 1998 to 2004 The BJP government in 1998 gave the go-ahead for the testing of nuclear bombs a reflection of the party's determination to raise India's profile as an aspiring world power even at the cost of economic sanctions. Economically, the BJP remained pragmatic during its time in government and pursued reformist policies. Politically, the BJP had to abandon some of the party's policy cornerstones, including the building a Hindu temple on the site of the Ayodhya mosque and abolishing India's separate civil code for India's Muslims to get the support of secular parties. Mr Vajpayee's popularity and integrity did much to move the party towards the political mainstream and put pragmatism over ideology. Consistent with this attempt to reinvent the essentially still The Economist Intelligence Unit Limited Country Profile 2006

10 6 India Hindu-nationalist party, the BJP government toned down its hardline Hindunationalist rhetoric in a bid to appeal to more mainstream voters as the 2004 general election approached. It presented itself both as a party that delivered economic prosperity and as a steward of a strong India with a presence on the global stage. The BJP promoted its "India is Shining" campaign, which aimed to capitalise on a buoyant economy partly the result of its economic reforms, but also of good fortune. In contrast, the opposition Congress party presented itself as the defender of India's inclusive, secular heritage. It tried to appeal to voters across castes and religions, as well as to the poor, who had not seen the fruits of economic reform. Composition of the Lok Sabhaa, Jun 2004 United Progressive Alliance (governing coalition) 222 Indian National Congress 145 Rashtriya Janata Dal 24 Dravida Munnetra Kazhagam 16 Nationalist Congress Party 9 Pattali Makkal Katchi 6 Telangana Rashtra Samithi 5 Jharkhand Mukti Morcha 5 Marumalarchi DMK 4 Lok Jan Shakti Party 4 Others 4 Left Front (supporting the governing coalition) 59 Communist Party (Marxist) 43 Communist Party of India 10 Others 6 National Democratic Alliance (opposition) 186 Bharatiya Janata Party (BJP) 138 Shiv Sena 12 Biju Janata Dal 11 Shiromani Akali Dal 8 Janata Dal (United) 8 Telugu Desam Party 5 All India Trinamool Congress 2 Nagaland People's Front 1 Mizo National Front 1 Other parties 76 Samajwadi Party 36 Bahujan Samaj Party 19 Other parties 13 Independents 8 Totalb 545 a The lower house of parliament. b Including two representatives of Anglo-Indians appointed by the president. Congress returns to power The "India is Shining" campaign backfired, with poor rural voters denied any new-found prosperity, and in a surprise victory a Congress-led coalition, the UPA, was narrowly elected to power in the May 2004 general election the Congress party (on its own) won only eight seats more than the BJP. However, the UPA fell short of a majority and is being supported in parliament by the Left Front group of communist parties, although these parties have chosen not to join the government and are supporting it "from outside". The minority Country Profile The Economist Intelligence Unit Limited 2006

11 India 7 government is led by Manmohan Singh, who was sworn in as prime minister following the refusal of the Congress leader, Sonia Gandhi, to take up the post. Mrs Gandhi remains the Congress party president and is the Congress leader in parliament. Mr Singh, who has held many important positions in the economic and civil service hierarchy in India, is a respected economist and a pragmatist and is highly regarded across the political spectrum. In his two first years in government he has managed to hold together an unwieldy coalition and has pursued a gradualist economic reform agenda. On the foreign policy front, Mr Singh, a Sikh born in the Pakistani portion of Punjab province, has continued a policy of rapprochement with Pakistan and has pushed India's bid for a permanent seat on the reformed UN Security Council. A nuclear deal with the US (which has still to be formally approved by the US Congress) has changed US-Indo relations and is likely to make India a vital US military and economic ally in coming years. The BJP has been in disarray The Left has come to resemble the official opposition The opposition BJP has been plagued by internal tensions and in-fighting since it fell from power and is therefore unlikely to pose a substantial threat to the UPA government. A major Islamic terrorist attack or sectarian violence could, however, galvanise its traditional Hindu constituency. At the end of 2005 Lal Krishna Advani was forced to step down as party president, following ideological differences that upset the Rashtriya Swayamsevak Sangh (RSS), the party's powerful parent organisation. Under a new president, Rajnath Singh, seen by many as an interim leader, the debate over the party's ideology has continued. The outcome of what could be a long-drawn-out leadership struggle will determine whether the BJP will go back to its traditional values of Hindu nationalism, or whether it will evolve into a more moderate force in Indian politics. The government faces no immediate threat to its survival and looks on course to last a full five-year term until However, it is severely hobbled in its ability to formulate and implement policy. Politics remains centred more on tensions within the UPA coalition and between the UPA and its notional allies, than on competition from the BJP. The main tension is between the reformist economic liberalism of several leading Congress figures, notably Mr Singh and the finance minister, Palaniappan Chidambaram, and the leftist populism of many government supporters. These include members of Congress and of its coalition partners, and in particular the communist parties, which are not in the UPA, but which lend parliamentary support to the UPA. Curiously, the largest of these, the Communist Party of India (Marxist), or CPI (M), has come to resemble the official opposition. Its strategy appears to be to use the leverage it now enjoys to expand its influence beyond those states where it is a major force West Bengal, Tripura and Kerala to the rest of India. To do this, it is relying on its supporters in the trade unions. This means that it has tried to block any reform seen as damaging the interests of the workforce in the "organised" sector a definition covering workplaces with more than ten employees. There are about 30m such workers out of a total labour force of more than 400m. They have become disproportionately powerful. The Economist Intelligence Unit Limited Country Profile 2006

12 8 India Important recent events April 2003 The prime minister, Atal Behari Vajpayee, initiates moves to defuse tensions with Pakistan, re-establishing communication and diplomatic links. June 2003 India and China reach de facto agreement over the status of Tibet and also of Sikkim a state whose accession to India in 1975 China still refuses to recognise officially in a crossborder trade agreement. November 2003 India matches Pakistan's offer of a ceasefire along the Line of Control in Kashmir. Pakistan's unilateral offer followed measures announced unexpectedly by the Indian government in October to improve ties with its neighbour. December 2003 India and Pakistan agree to resume direct air links and to allow overflights. India had suspended air links after the December 2001 attack on the Indian parliament, which it blamed on Pakistani terrorists. January 2004 A groundbreaking meeting is held between the Indian government and moderate Kashmiri separatists, marking a new chapter in the 14-year stand-off between the Indian government and the separatists. February 2004 Formal peace talks over the disputed region of Kashmir are held in the Pakistani capital, Islamabad. May 2004 A general election brings the Congress-led United Progressive Alliance (UPA) to power. Sonia Gandhi, the Congress leader, refuses to become prime minister. The post goes to Manmohan Singh, a former finance minister and reformer. December 2004 Thousands die in the Asian tsunami; the Andaman and Nicobar Islands are devastated. April 2005 A bus service between Srinagar, in Indian-controlled Kashmir, and Muzaffarabad, in Pakistani-controlled Kashmir, comes into operation. July 2005 Islamist militants attack a holy site in Ayodhya the flash-point of Hindu-Muslim strife in 1992 raising concerns over possible renewed inter-community violence in India and a stalling of improving relations between India and Pakistan. October 2005 A devastating earthquake, with its epicentre in Pakistani-administered Kashmir, kills more than 1,000 people in Indian-administered Kashmir. Tens of thousands die in neighbouring Pakistan. Country Profile The Economist Intelligence Unit Limited 2006

13 India 9 October 2005 Three bombs in a crowded marketplaces in Delhi kill 62 people and injure over 200. A little-known Kashmiri group claims responsibility for the attack. February 2006 India's larges ever rural jobs scheme is launched with the aim of lifting around 60m families out of poverty. March 2006 India and the US sign a landmark nuclear deal, which gives India access to civilian nuclear technology, while India agrees to greater scrutiny of its civilian nuclear programme. May 2006 Congress performs poorly in four important state elections in Assam, Kerala, Tamil Nadu and West Bengal. The communists, on whose support the UPA relies, win convincingly in West Bengal and Kerala. July 2006 Several bombs target Mumbai's commuter train system, killing over 200 people. Pakistan's president condemns the attack, and the Indo-Pakistani peace process continues. Constitution, institutions and administration Federalism The judiciary and the legislature The Republic of India is a constitutional federal democracy made up of 28 states and seven union territories. The Indian constitution defines the division of most powers between the centre and the states, although the centre takes precedence in relation to residual powers. Representation in parliament has been frozen on the basis of the results of the 1971 census. Given that population growth is much higher in the northern states, the relative value of votes cast in the north in terms of political representation has fallen. The National Population Council has recommended an extension of the "freeze" on representation until This is likely to become a source of major tension between the country's northern and southern states. India's federal structure often leads to demands for further devolution of powers to the states, as well as demands for new states to be created. In 2000 three new states Chhattisgarh, Jharkhand and Uttaranchal (all three northern states with strong tribal representations) were formed from Madhya Pradesh, Bihar and Uttar Pradesh respectively. The Indian constitution provides for an independent judiciary, with high courts in every state and a Supreme Court in New Delhi. There are two houses of parliament. The lower house, or Lok Sabha (house of the people), is elected every five years by universal adult suffrage. The prime minister is elected by the Lok Sabha. Members of the upper house, or Rajya Sabha (house of the states), are elected by their respective state legislatures, according to state quotas based on population. The president is elected every five years by both houses of parliament and the state legislatures. He is confined to acting on the advice of the Council of Ministers, which is chosen by the prime minister. The Economist Intelligence Unit Limited Country Profile 2006

14 10 India Democracy and corruption The centre versus the states India is the world's most populous democracy and has held regular and largely free elections since For members of parliament, the chances of re-election to the Lok Sabha are low (as anti-incumbency is a key trend in Indian politics), tending to increase the incentives for politicians to maximise their personal gains rather than working for the welfare of their electorate. The Election Commission of India (ECI) has wide powers to requisition the government machinery for elections and has ensured fairly orderly elections; in 2003 it won the right to make candidates disclose criminal records. However, there are occasional cases of poll rigging and intimidation; spending limits on candidates are poorly enforced and candidates with criminal records are sometimes elected, particularly to the state assemblies. Generally, a high level of political awareness and the sheer size of the electorate nevertheless ensure that the final results reflect the wishes of the people, and the ousting of incumbent administrations has become increasingly frequent. Congress, which led the agitation for independence, emerged as the dominant party thereafter and won elections in most states in the 1950s and 1960s, although the communists and Tamil separatists occasionally won state-level elections. The situation changed following the state of emergency. Caste and regional splinters from the opposition alliance that won the 1977 election were increasingly successful in state elections. In the current political landscape, none of the three national parties Congress, the BJP and the CPI (M) can hope to win a majority in the central government on its own, and each needs to ally itself with regional or caste-based parties. India's 28 states vary enormously in size, population and natural resources. The centre's powers to tax income, production and foreign trade give it far greater access to revenue, a large part of which is shared out among the states by the planning commission and by finance commissions that are appointed every five years. The states cannot borrow without the centre's permission. However, as the central government has become increasingly reliant on the support of regional allies, it has found it harder to refuse the states' demands to manage their own finances. The deficits of both the centre and the states are largely financed by banks and financial institutions, which channel public savings to the governments. This pre-emption of bank funds to finance excess consumption by the government amounting to about 10% of GDP per year has become a drag on economic growth. As central controls on industry, finance and foreign trade have been relaxed since the early 1990s, industry has received the freedom to relocate, but has faced greater competition. These competitive pressures have been passed on to the states, which have tried to attract and retain industry. In this competition, the advanced western and southern states have been more successful: as foreign trade has become freer, industry has moved closer to Gujarat, Maharashtra, Karnataka and Tamil Nadu. In an effort to cut costs, producers have also moved closer to suppliers and markets. This has led to a prolonged slump in long-distance road transport, from which it is now slowly emerging. Country Profile The Economist Intelligence Unit Limited 2006

15 India 11 Political forces The Congress party Congress led the campaign for independence and has remained a powerful force in Indian politics, transcending religious, ethnic and caste divisions. However, it is also a party tightly focused on its heritage: members of the Nehru-Gandhi family have led the party throughout most of its history. India's first prime minister, Jawaharlal Nehru, was succeeded by Lal Bahadur Shastri, who died within a year of taking office. The party then turned to Nehru's daughter, Indira Gandhi, who remained leader until her assassination in 1984, after which her son Rajiv took over as party leader. He was assassinated in 1991, and Congress is now led by his widow, Sonia. The decline of Congress began when Indira Gandhi declared a state of emergency. Her opponents combined to form the Janata Party, which won the 1977 election. In 1980 Mrs Gandhi brought down the Janata government and returned to power. Rajiv Ghandi came to power in 1984 with the largest majority ever and the aim of liberalising and modernising government, but he was soon mired in a corruption scandal and lost the 1989 election. He managed to split and finally bring down the Janata Dal government that followed him, but he was killed before the 1991 general election. Although falling just short of a majority, Congress formed a government, and after the election carried out considerable economic liberalisation in an attempt to solve the country's balance-of-payments crisis. That did not, however, save it from defeat in the 1996 election. As repeated efforts to form a national alternative failed, the electorate turned to regional and caste-based parties. Following Congress's poor performance in the 1998 general election, Rajiv Gandhi's Italian-born widow, Sonia, gave in to repeated requests and took over as party leader. However, her foreign birth has prompted criticism in parts of Congress as well as from the BJP. Following Congress's surprise victory in the 2004 general election, Mrs Gandhi declined to take up the post of prime minister, instead nominating Manmohan Singh. But Mrs Gandhi remained the leader of Congress, and until March 2006 chair of the National Advisory Council a post she had to relinquish on technical grounds, which also led to her resignation as member of parliament in early However, in May 2006 she was re-elected with a landslide victory in the Nehru-Gandhi stronghold constituency of Rae Bareilly in Uttar Pradesh. Most commentators believe that the centre of power within the government lies with Mrs Gandhi rather than Mr Singh. The stability of the current Congress-led minority government depends crucially on how readily the Left Front parties withdraw their support in case of disagreement over policy. They boycotted the co-ordination committee, in which the Left Parties agree policy with the UPA, for four months in 2005 and eventually got their way, scuppering the economic reforms the government sought to implement. The Left Front has an effective veto over any reform that requires a vote in parliament. Following the Communist parties' landslide wins in state elections in West Bengal and Kerala in the first half of 2006, they are likely to become more assertive at the national level. Congress will probably be forced to consult the Left Front more than it has in the past. The Left Front has already stymied several important reforms, notably labour market reform and privatisation. Given that it has three years of its five-year term still to run, the The Economist Intelligence Unit Limited Country Profile 2006

16 12 India government will need to tread a fine line between its reform ambitions and policy compromises with its political allies. While the government will try to distribute the benefits of economic growth more widely, its overriding objective will be to ensure the continuation of India's economic boom. Equally important, however, are divisions within Congress that could result in government instability. Loyalties in the Council of Ministers are likely to be split between Mr Singh and Mrs Gandhi. Mrs Gandhi will have to reconcile the demands of individual members of the government as well as interest groups within the diverse Congress party to secure a stable government. Congress's success in the 2004 general election is evidence that the dynastic claim still exerts considerable force, particularly in rural areas. Congress profited from the excitement created by the candidacy of Rahul Gandhi, Mrs Gandhi's son, and her charismatic daughter, Priyanka. Rahul Gandhi is widely believed to be a likely future candidate to lead the party. The BJP The Bharatiya Janata Party (BJP) traces its roots back to the Bharatiya Jan Sangh, a party representing traditional Hindu values and the interests of small businesses, traders and the middle class. It is the political wing of a group of interconnected cultural and religious movements the Sangh Parivar of which the most politically significant is the Rashtriya Swayamsevak Sangh (RSS), a disciplined cadre organisation that counts the president of the BJP, Rajnath Singh, and the party's senior leaders, Lal Krishna Advani and Atal Behari Vajpayee, among its former members. A member of the RSS assassinated Mahatma Gandhi, and the group is seen by its critics as sinister and anti-muslim. The BJP emerged as a significant force in the 1989 general election, winning 88 seats. A central campaign issue was the demand that a Hindu temple be constructed on the site of the Babri mosque in Ayodhya in Uttar Pradesh which many Hindus believe was built upon the site of a temple marking the birthplace of the Hindu god-king Ram. In the 1991 election the BJP established itself as the main national opposition and won power in four states. In December 1992 Sangh Parivar activists demolished the Babri mosque, triggering communal riots that left thousands dead. In the 1993 state elections the BJP suffered setbacks and won control of just one state, but in the 1996 general election it won 160 seats in the Lok Sabha. In May 1996 the BJP formed its first national government, led by Mr Vajpayee, which lasted just 13 days. The BJP re-emerged as the power broker in 1998, when it won 182 seats in the general election and cobbled together a coalition of 13 parties under Mr Vajpayee's leadership. The coalition proved unwieldy, collapsing in April However, Mr Vajpayee proved himself able to rally parties of disparate political persuasions to form a government. Another election in September-October 1999 returned a BJP-led coalition of 20 partners to power. Members of the new coalition, the National Democratic Alliance, campaigned under a common platform and won 302 seats. Despite the increased majority, however, the range of parties involved in government left the alliance vulnerable to the whims of smaller regional parties. Country Profile The Economist Intelligence Unit Limited 2006

17 India 13 Mr Vajpayee sought to rein in the party's more extreme Hindu-nationalist members, particularly in relation to questions of economic reform. But the party's reformist credentials proved increasingly shaky in the face of conflicting demands from coalition members and resistance from the BJP's nationalist wing. The close relations the party cultivated with leading industrialists also resulted in increased protection for some industries from foreign competition. On the foreign policy front, Mr Vajpayee sought improved relations with neighbouring Pakistan and paved the way for further confidence-building measures implemented by the UPA government, including the partial withdrawal of Indian troops from Kashmir in November 2004 and the establishment of a crossborder bus link in April Since the electoral defeat in May 2004, the BJP has been in disarray. Following a further electoral defeat in October of that year in the politically important state of Maharashtra, the party appointed Lal Krishna Advani, one of the founders of the BJP and previously Mr Vajpayee's right-hand man, as party president. The BJP's identity crisis worsened in June 2005, when Mr Advani offered to stand down as party president after an official visit to Pakistan, during which he described Pakistan's founder, Mohammed Ali Jinnah, as a "secular" leader. The comments, possibly made by Mr Advani in an attempt to shed his image as a hardliner and to move the party more towards the mainstream, divided the BJP down the middle and outraged Hindu-nationalist organisations close to the BJP one of the cardinal tenets of modern Indian history is that Mr Jinnah was the non-secular architect of the two-nation theory (an India for Hindus and a Pakistan for Muslims). Eventually, a considerably weakened Mr Advani was forced to resign at the end of His successor is the less controversial Rajnath Singh, who is seen as a skilful grass-roots organiser and effective administrator, but his appointment has only temporarily suspended a divisive succession battle. Few of the younger generation of BJP leaders, such as Arun Jaitley, have the mass base enjoyed by Mr Advani or Mr Vajpayee. An exception on the Hindu right is the chief minister of Gujarat, Narendra Modi, who commands grass-roots support in right-wing Gujarat, but few see him as a potential national election-winner (as he remains too far on the right). The outcome of the struggle is likely to determine whether the BJP will go back to its traditional values of Hindu nationalism or evolve into a more moderate force in Indian politics. The communist parties The Communist Party of India (CPI) emerged from Congress, splitting from the Indian National Congress during the second world war. The CPI itself later split to form a Marxist group, the Communist Party of India (Marxist) or CPI (M). The CPI (M) is strongest in West Bengal, where it has been in power for 26 years, and it has frequently held power in Kerala and Tripura. Although the "third force" includes several powerful regional parties that are increasingly important in a fractured political scene, these parties have no strong ideological commitment to a common agenda. Instead, they are motivated by state or caste interests that can often be better served through alliances with the BJP or Congress. More recently, the Left Front group of communist parties decided not to join the Congress-led UPA government formally, but to support it from "the outside". The communists strongly oppose the deregulation of the labour The Economist Intelligence Unit Limited Country Profile 2006

18 14 India market and privatisation, but have at times been more pragmatic on other policy issues, such as foreign investment. Main political figures Manmohan Singh Prime minister. Mr Singh has held many important positions in the economic and civil service hierarchy, including governor of the Reserve Bank of India (the central bank) and deputy chairman of the Planning Commission. An Oxfordeducated economist, Mr Singh is widely respected across political parties and has a reputation of being a pragmatist. However, his critics argue that he is a weak political figure governing at the request of Sonia Gandhi. Throughout his political life he has been an appointee he has never won a seat in India's lower house of parliament, the Lok Sabha. Sonia Gandhi Indian National Congress party leader in parliament, and Congress party president. Mrs Gandhi is the Italian-born widow of a former prime minister, Rajiv Gandhi. She led Congress to success in the 2004 general election but declined the offered post of prime minister. This move enhanced her moral stature in a culture with a long history of renunciation. In March 2006 Mrs Gandhi resigned as member of parliament and chair of the National Advisory Council, an "office of profit" she was not supposed to hold under Indian law to avoid a conflict of interests. She was re-elected with an overwhelming majority from her constituency Rae Bareilly in Uttar Pradesh in May Rahul and Priyanka Gandhi Mrs Gandhi's children and heirs to the Nehru-Gandhi dynasty. In the 2004 election campaign Rahul and his sister Priyanka emerged as the Congress's star campaigners, galvanising the campaign by their youth and emphasising the fact that the century-old Gandhi-Nehru dynasty remains India's most powerful and charismatic political family. Rahul was elected to the lower house of parliament for the first time and is being groomed as the next leader of the Congress party. Palaniappan Chidambaram Finance minister. Mr Chidambaram is a suave, articulate politician from the southern Indian state of Tamil Nadu. He is well-known for his pro-market reforms, particularly tax reform and budgetary discipline, during his tenure as finance minister in A Harvard-educated lawyer and a strong supporter of the World Trade Organisation, Mr Chidambaram is popular in business circles. Arjun Singh The minister for human resources and development. His plans in early 2006 to increase the number of reserved places for backward castes in higher education are highly controversial and have put him at loggerheads with the prime minister, whose job he believes should be his. Shivraj Patil A respected and experienced politician, he held several ministries under the Congress governments of Indira and Rajiv Gandhi. His appointment as interior minister came as surprise because he had lost his seat in the May 2004 general election. Pranab Mukherjee Defence minister. A prominent Gandhi family loyalist, Mr Mukherjee held at least half a dozen important ministries in past Congress governments, including finance and external affairs. He has close links with the left. Laloo Prasad Yadav Railway minister. Informally rules the most lawless state of Bihar by proxy. He formed the Rashtriya Janata Dal (RJD) in 1997, after breaking away from the Janata Dal party. His party is a key ally of Congress in the United Progressive Alliance (UPA) government. Country Profile The Economist Intelligence Unit Limited 2006

19 India 15 Rajnath Singh President of the opposition Bharatiya Janata Dal (BJP) since the start of Mr Singh held various important posts in his political career, including chief minister of Uttar Pradesh and minister of agriculture in the Vajpayee government. He is an effective administrator and grassroots organiser, but has the reputation of being uncharismatic. Lal Krishna Advani A senior figure in the Bharatiya Janata Dal (BJP) party. Mr Advani is credited with making the BJP a major political force since 1984, when it held only two parliamentary seats. He resigned as party president in December 2005, but remains the leader of the opposition in the Lok Sabha. Despite his age (77) Mr Advani has not ruled out running for the post of prime minister in Atal Behari Vajpayee Former prime minister and former foreign minister (in a left-right anti-indira Gandhi coalition in the late 1970s), Mr Vajpayee has had a distinguished parliamentary career. Following the BJP's defeat in the May 2004 general election he became the party's chairman, a newly created and largely symbolic position, and has been acting as an elder statesman guiding the party. Abdul Kalam President of India. A former scientist and founding father of India's nuclear-missile programme. A Muslim, Mr Kalam, who is widely respected, was elected president by an overwhelming majority in July Somnath Chatterjee Speaker of the Lok Sabha. A veteran Marxist leader, Mr Chatterjee is the first communist leader to occupy this position. A member of parliament for the tenth time, Mr Chatterjee has established a rapport with politicians across party lines. Mulayam Singh Yadav Chief minister of Uttar Pradesh, India's most populous state. Leader of the Uttar Pradesh-based Samajwadi Party and former defence minister in the United Front (UF) coalition. Important among the new breed of "backward caste" politicians. International relations and defence Independence and its aftermath India became independent in 1947 at the start of the cold war. Mr Nehru had visited the Soviet Union in the 1930s and felt that it provided the best economic model for India's development. Consequently, India did not join the Western alliance, and instead followed a policy of neutrality between the two blocs. Pakistan, meanwhile, joined the US-led South-East Asian Treaty Organisation. India's defeat by China in a short war in 1962 brought the US and India briefly closer, but as Indian relations with Pakistan deteriorated, US sympathy for India waned. In 1971, when Hindu refugees from East Pakistan flooded into India, India decided to attack Pakistan, and to ward off the US, entered into a treaty with the Soviet Union. The treaty provided India with low-cost security for the next 18 years. Since the collapse of the Soviet Union India has built closer relations with the US and the West. Its liberal reforms in the early 1990s also made it more receptive to foreign trade and investment and led Western countries to take a greater interest in India. The 1998 nuclear tests caused a glitch in the process, but it has continued nevertheless. Indian-US relations entered a new era in 2005, when the two countries agreed to deepen their co-operation in the area of defence, including joint weapons production, greater technology sharing, and increased trade in arms. In March 2006 the US president, George W Bush, The Economist Intelligence Unit Limited Country Profile 2006

20 16 India visited India and signed a landmark deal that welcomed India into the club of states that the US permits to possess nuclear weapons. The deal changes the world's nuclear order by amending the Nuclear Non-Proliferation Treaty (NPT), but it will first require the approval of the US Congress. Under the agreement the US offers India "full civil nuclear energy co-operation and trade", thereby ending sanctions in place against India since its refusal to sign the NPT. (Since 1968 it has been a tenet of US foreign policy that only countries that sign the NPT are permitted access to US nuclear technology.) However, Mr Bush sidestepped the issue of backing India's bid for permanent membership on the UN Security Council by arguing that the UN first needed a series of "administrative" reforms. Meanwhile, India has stepped up its military expenditure considerably in the past five years. Relations with Pakistan look a little brighter Since independence, India has fought three wars with Pakistan and one with China. Disputes with Pakistan have been mainly territorial. In 1947 Pakistani tribesmen invaded the mainly Muslim princely state of Jammu and Kashmir, and Indian forces intervened at the request of the state's Hindu maharaja. The resulting war left about one-third of Kashmir with Pakistan and the remainder with India (in 1963 Pakistan ceded some of the territory it controlled to China). Kashmir remains the subject of bitter dispute between the two countries. A short war was fought in 1965 over a Pakistani incursion into disputed territory in Kutch. Another war was fought over the exodus of Hindu refugees from East Pakistan in 1971; it ended with the separation of East and West Pakistan, and the creation of Bangladesh. The victory of the BJP-led coalition at the general election in 1998 produced a notable cooling in relations with Pakistan, compounded by both countries' nuclear tests in May that year. Talks between the two sides resumed in October 1998, culminating in the so-called bus diplomacy that saw Mr Vajpayee journey across the border for talks with his Pakistani counterpart, Nawaz Sharif, the following year. However, any thaw was quickly undone when Pakistani-backed insurgents crossed the Line of Control (LoC) dividing Indian and Pakistani positions in Kashmir, capturing several high-altitude Indian border posts in the Kargil sector in May During two months of intense fighting each side lost hundreds of men, and the conflict threatened to escalate into all-out war. The crisis was resolved in July, when the Pakistani government agreed to withdraw the intruders. Three months later the commander-in-chief of the Pakistani army, General Pervez Musharraf, staged a coup and removed Mr Sharif's elected government. In November 2000, two years after the failed bus diplomacy, India again took the initiative on Kashmir, announcing, and subsequently extending, a unilateral ceasefire. At the end of May 2001 Mr Vajpayee called off the ceasefire and invited General Musharraf for talks in Agra in July. On the second day of talks General Musharraf said that an agreement on Kashmir must come before other normalising measures. His Indian hosts were embarrassed, and the talks broke up without an understanding being reached. After the September 11th 2001 terrorist attacks in the US, General Musharraf supported US action against the Taliban in Afghanistan and subsequently Country Profile The Economist Intelligence Unit Limited 2006