India. Country Profile 2004

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1 Country Profile 2004 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 15 Regent St, London SW1Y 4LR 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 its 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 15 Regent St London SW1Y 4LR 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, on-line databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2004 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.

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4 Country Profile The Economist Intelligence Unit Limited 2004

5 India 1 Contents 3 Regional overview 3 Membership of organisations 4 Basic data 5 Politics 5 Political background 6 Recent political developments 9 Constitution, institutions and administration 11 Political forces 15 International relations and defence 20 Resources and infrastructure 20 Population 22 Education 22 Health 23 Natural resources and the environment 23 Transport, communications and the Internet 26 Energy provision 28 The economy 28 Economic structure 29 Economic policy 31 Economic performance 33 Regional trends 34 Economic sectors 34 Agriculture 35 Mining and semi-processing 36 Manufacturing 38 Construction 38 Financial services 39 Other services 40 The external sector 40 Trade in goods 41 Invisibles and the current account 41 Capital flows and foreign debt 42 Foreign reserves and the exchange rate 44 Appendices 44 Sources of information 45 Reference tables 45 Population statistics 46 Transport statistics 46 Energy statistics 47 Government finances 47 Gross domestic product 48 Gross domestic product by sector, at constant prices 48 Gross domestic product by sector, at factor cost 48 Money supply The Economist Intelligence Unit Limited Country Profile 2004

6 2 India 49 Prices and wages 49 Availability of selected consumption items 50 Agricultural production 50 Minerals production 51 Industrial production 51 Gross domestic savings 51 Stockmarket indicators 52 Exports 53 Imports 54 Main trading partners 55 Balance of payments, IMF series 56 Balance of payments, national series 56 External debt 57 Foreign-exchange reserves 57 Exchange rates Country Profile The Economist Intelligence Unit Limited 2004

7 India 3 Regional overview Membership of organisations The South Asian Association for Regional Co-operation The South Asian Association for Regional Co-operation (SAARC), which comprises India, Pakistan, Sri Lanka, Bangladesh, Nepal, the Maldives and Bhutan, was established in 1985 at a meeting in Bangladesh. SAARC s aims include promoting welfare, accelerating economic growth, eradicating poverty and improving relations between member states. Summit meetings are intended to be held annually and are complemented by technical committees, meetings of foreign ministers and a standing committee of the foreign secretaries (civil servants) of each country. An under-resourced secretariat, based in Kathmandu, co-ordinates SAARC s activities. In the early years, agreements were made to establish a food security reserve (an agreement that has never been implemented), to establish a meteorological centre, to combat terrorism and to create various cultural exchanges between member states. Together with micro-level issues, SAARC has also proposed the creation of a South Asian Free-Trade Area (SAFTA). SAFTA is seen as a replacement for the South Asian Preferential Trading Arrangement, which was agreed in 1995 and which had by 1996 identified more than 2,000 products as eligible for preferential treatment. At the 12th SAARC summit in January 2004, SAARC member countries signed an accord that schedules the creation of SAFTA for January 1st A customs union is to be created by 2015 and an economic union by Political factors weigh against this timetable, however. The 2004 summit, held in the Pakistani capital, Islamabad, was dominated by landmark talks between the leaders of India and Pakistan over the disputed border territory of Kashmir. In spite of a recent gradual improvement, tensions between India and Pakistan continue to hamper SAARC s progress on wider issues, although the association has been relatively effective in providing a forum for meetings of non-governmental organisations and professional groupings. There is pressure on SAARC from the smaller countries for the association to deal with bilateral issues; much of this pressure stems from the problematic relationship between India and Pakistan. There is a consensus that this issue prevents multilateral progress, thus leading to a growing emphasis on bilateral trading relationships. India has signed bilateral free-trade agreements, effectively bypassing SAARC, with Nepal (1996) and Sri Lanka (2000). Bhutan and India also have a free-trade agreement. Much of SAARC s work is also likely to be superseded by World Trade Organisation (WTO) regulations. SAARC s ability to reposition itself as the preferred conduit for bilateral relationships within South Asia is likely to determine the success or otherwise of the organisation. SAARC s success in arranging greater civil society linkages within South Asia contrasts strongly with its failure to boost government-level ties. Improved relations between India and Pakistan, the largest members of SAARC, remain a prerequisite for closer economic co-operation in the region; the potential gains from increased trade are immense. At present, intra-regional trade accounts for only about 5% of total trade by SAARC nations. The next SAARC summit will be held in January 2005 in Bangladesh. The Economist Intelligence Unit Limited Country Profile 2004

8 4 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 1.05bn (mid-2003) 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 north-west, tropical humid in north-east and most of peninsula, tundra in 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 (82% in 1991 census); Muslim (12.1%); 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 2003: Rs46.58:US$1. Exchange rate on May 17th 2004: Rs45.50: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 Country Profile The Economist Intelligence Unit Limited 2004

9 India 5 Politics India is a parliamentary federal democracy with an indirectly elected president, 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. After 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. 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. Mrs Gandhi s administration continued to implement an inward-looking economic policy but 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. The Economist Intelligence Unit Limited Country Profile 2004

10 6 India 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. He won an unprecedented majority in an election later that year, and his administration began 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 that initiated a series of economic reforms. The May 1996 elections returned another hung parliament. The Hindu-nationalist Bharatiya Janata Party (BJP) formed a government that lasted just 13 days; this was followed by a left-leaning 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. Recent political developments The BJP leads a coalition government from 1998 to 2004 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 Although it cobbled together a more secure majority, with 302 of the 543 parliamentary seats, the alliance of more than 20 parties included a number of unreliable partners. These smaller regional and caste-based parties exercised disproportionate influence in government, often holding the administration to ransom in order to gain concessions in their home states. The BJP government gradually jettisoned its hardline Hindu-nationalist 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. An excellent monsoon delivered a record agricultural output in fiscal year 2003/04 (April-March), which lifted annual GDP growth above the 8% mark. 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. Country Profile The Economist Intelligence Unit Limited 2004

11 India 7 Congress returns to power The May 2004 general election returned a Congress-led coalition, the United Progressive Alliance (UPA), to power. The UPA fell short of a majority and is being supported in parliament by the Left Front communist parties, although these parties have chosen not to join the government and are supporting it from outside. The minority government is being 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 will be the Congress leader in parliament and will remain Congress party president. Mr Singh, who has held many important positions in the economic and civil service hierarchy in India, is a respected economist, a pragmatist, and is highly regarded across the political spectrum. He is widely credited with the successful implementation of wide-ranging economic reforms as finance minister in a Congress-led minority government in 1991 at a time of deep economic crisis. The new cabinet consists of non-reformist Congress stalwarts, alliance members, and two pro-reformers in key positions, namely Mr Singh as prime minister and Panaliappan Chidambaram as finance minister. Forces within the cabinet will pull in both a pro-reform and an anti-reform direction. As under the previous administration, governmental performance is likely to be hampered by pervasive lobbying of the government by coalition partners for spending and concessions benefiting narrow interest-groups. Concerns that the BJP may regain power if the government falls are likely to deter coalition partners from withdrawing support. However, the minority government is inherently unstable, and may not last its entire five-year term. Composition of the Lok Sabha, May 2004a Party No. of seats United Progressive Alliance (UPA) 217 Congress 145 Rashtriya Janata Dal 21 Dravida Munnetra Kazahagam (DMK) 16 Nationalist Congress Party (NCP) 9 Pattali Makkal Katchi 6 Telengana Rajya Sabha 5 Jharkhand Mukti Morcha 5 Marumalrchi DMK 4 Lok Jan Shakti Party (LJSP) 3 J&K People s Democratic Party 1 Republican Party (Ambedkar) 1 Muslim League 1 United Progressive Alliance allies 121 Communist Party of India (Marxist) 43 Samajwadi Party 36 Bahujan Samaj Party (BSP) 19 Other Left Front parties 16 Other outside support 7 The Economist Intelligence Unit Limited Country Profile 2004

12 8 India Composition of the Lok Sabha, May 2004a Party No. of seats BJP & allies 185 Bharatiya Janata Party (BJP) 138 Shiv Sena 12 Biju Janata Dal 11 Shiromani Akali Dal 8 Janata Dal (United) 7 Telugu Desam Party (TDP) 5 All India Trinamool Congress (AITC) 2 Nagaland People s Front 1 Mizo National Front 1 Others 19 Total 545 a The lower house of parliament. Source: Lok Sabha. Important recent events September-October 1999 A general election returns the BJP-led coalition to power under Atal Behari Vajpayee. November 2000 India announces the first ever unilateral ceasefire in Kashmir. April 2001 The remaining quantitative restrictions on imports are lifted. However, freer trade is hampered by high tariffs on many items. June 2001 India calls off the ceasefire in Kashmir and invites Pakistan s leader, General Pervez Musharraf, to meet in India to discuss relations between the two countries, including the Kashmir issue. December 2001 Four terrorists try to enter the Indian parliament and are killed after a four-hour shoot-out. India accuses Pakistan of having instigated the attack, and moves troops to the border. January 2002 Hindu revivalists step up a campaign to build a temple on the site of a 16th-century mosque in Ayodhya that they pulled down in February 2002 A Muslim mob attacks Hindu volunteers travelling back from Ayodhya in Godhra in Gujarat. Fifty-seven are burnt alive in a railway carriage. Riots follow in Gujarat in which 900 people are killed and over 100,000 rendered homeless. October 2002 India announces that it will begin to withdraw its troops from its border with Pakistan, and Pakistan reciprocates. Country Profile The Economist Intelligence Unit Limited 2004

13 India 9 April 2003 Mr Vajpayee begins moves to defuse tension 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. August 2003 At least 50 people are killed in two simultaneous car bomb blasts in Mumbai. 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. India and Pakistan agree to hold further negotiations in May or June, following the Indian general election. May 2004 A general election returns the Congress-led United Progressive Alliance to power against all expectations. Sonia Gandhi, the Congress leader, refuses to become prime minister. Manmohan Singh, a former finance minister and reformer, is sworn in as prime minister. Constitution, institutions and administration Federalism The Republic of India is a constitutional federal democracy made up of 29 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 The Economist Intelligence Unit Limited Country Profile 2004

14 10 India 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 judiciary and the legislature Democracy and corruption The centre versus the states 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. India is the world s most populous democracy and has held regular and largely free elections since 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. A high level of political awareness and the sheer size of the electorate nevertheless generally ensures that the final results reflect the wishes of the people, and the ousting of incumbent administrations is 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 Communist Party of India (Marxist) can hope to win a majority in the central government on its own, and each needs to ally itself with more localised parties. India s 29 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. Both the centre s and the states deficits 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 each year has become a drag on economic growth. Country Profile The Economist Intelligence Unit Limited 2004

15 India 11 As central controls on industry, finance and foreign trade have been relaxed in the past decade, industry has received the freedom to relocate but at the same time 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 littoral 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, causing long-distance road transport to enter a prolonged slump, from which it is now slowly emerging. 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 when her son, Rajiv, took over as party leader. Rajiv was assassinated in 1991 and Congress is now led by his widow, Sonia. The decline of Congress began when Mrs 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. Her son, Rajiv, 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 too 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 majority, Congress formed a government after the election and, under the spur of a payments crisis, carried out considerable economic liberalisation. 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 by the BJP. Three Congress party members were expelled from the party for challenging Mrs Gandhi s credentials for the leadership; they included a powerful senior figure, Sharad Pawar, who went on to establish the Nationalist Congress Party (NCP) in the electorally significant state of Maharashtra where Congress and the NCP make up a coalition state government. The stability of the current Congress-led government depends crucially on how readily the Left Front group of communist parties withdraws its support in case of disagreement over policy. Equally important, however, are divisions within Congress which could result in government instability. Loyalties in the Council of Ministers are likely to be split between Mr Singh and Mrs Gandhi. The Economist Intelligence Unit Limited Country Profile 2004

16 12 India Mrs Gandhi will have to reconcile the demands of individual members of the government as well as interest groups within the diverse Congress party in order 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, 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. 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 RSS (Rashtriya Swayamsevak Sangh), a disciplined cadre organisation that counts the prime minister and home minister among its members. The RSS, one of whose members assassinated Mahatma Gandhi, is seen by its critics as a sinister, anti-muslim group. 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 earlier 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 just one state administration, 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 Atal Behari 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. For instance, when the Andhra Pradesh-based Telugu Desam Party (TDP) withdrew its support for the government in the vote on the BJP s performance in riot-torn Gujarat in 2002, the BJP hurriedly formed an alliance with the Bahujan Samaj Party (BSP) in Uttar Pradesh, despite the failure of a previous alliance with that party. As leader of the BJP s moderate wing, Mr Vajpayee has 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 Country Profile The Economist Intelligence Unit Limited 2004

17 India 13 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 matters did improve; formal peace talks were held in February 2004 in the Pakistani capital, Islamabad, and the two countries agreed to hold further negotiations. The communist parties The failure of the third force 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 two decades, and it has frequently held power in Kerala. 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 formally join the Congress-led UPA government, but to support it from the outside. The United Front (UF) coalition that fell at the end of 1997 comprised several Congress offshoots. The largest was the Janata Dal. Based on the support of Other Backward Castes (OBCs, a governmental classification) and Muslims, the party has provided three of India s prime ministers in the last ten years. However, it has been even more weakened than Congress by splits and defections. First, a former party leader, Laloo Prasad Yadav, formed the Rashtriya Janata Dal (RJD). More recently, the party s leader in Karnataka, J H Patel, formed an election alliance with the BJP-led NDA. Other former members of the UF, including the TDP in Andhra Pradesh and the Samajwadi Party, led by Mulayam Singh Yadav, left the alliance after the 1998 election, and the TDP has since aligned itself with the BJP. Main political figures Manmohan Singh Prime minister and former finance minister (in a minority government under Narasimha Rao) in the early 1990s. Has held many important positions in the economic/civil service hierarchy including governor of the Reserve Bank (the central bank) and deputy chairman of the Planning Commission. An Oxford-educated economist, Mr Singh is widely respected across political parties and has a reputation of being a pragmatist without ideological posturing. Sonia Gandhi Italian-born widow of a former prime minister, Rajiv Gandhi, and Congress party leader in parliament and Congress party president. Led Congress to success in the 2004 general election. Declined the post of prime minister, a move that enhanced her moral stature. Retains significant appeal as heir to the Nehru-Gandhi dynasty, particularly in rural areas, although her Italian origins count against her. Her daughter, Priyanka, is widely seen as the natural heir to the dynasty. The Economist Intelligence Unit Limited Country Profile 2004

18 14 India Palaniappan Chidambaram Finance minister. 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 Harvardeducated lawyer and a strong supporter of the World Trade Organisation, Mr Chidambaram is popular with businesses. Shivraj Patil Interior minister. A respected and experienced politician, he held several ministries under Congress governments of Indira and Rajiv Gandhi. His appointment to the key position of interior minister came as surprise as he lost his seat in the May 2004 general election. A former university lecturer, Mr Patil is also a former speaker of the Lok Sabha, the lower house of parliament. Natwar Singh External affairs minister. A career diplomat and former ambassador to Pakistan, Mr Singh was a junior minister in Rajiv Gandhi s cabinet. 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. The Rashtriya Janata Dal (RJD) leader made his wife, Rabri Devi, the chief minister of the state in 1997, following a corruption scandal which forced him to resign. He formed the RJD in 1997, after breaking away from the Janata Dal party. Lal Krishna Advani Leader of the opposition Bharatiya Janata Dal (BJP) party. The former deputy prime minister under Mr Vajpayee is often described as a soft-spoken hardliner. He created a major controversy in 1992 by leading a rath yatra (chariot journey) to the city of Ayodhya, a trip that culminated in the destruction of the Babri mosque. Mr Advani is credited with making the BJP a major political force since 1984, when it held only two parliamentary seats. Atal Behari Vajpayee Former prime minister and former foreign minister (in a left-right anti-indira Gandhi coalition in the late 1970s), who has had a distinguished parliamentary career. Respected by politicians and voters from across the political spectrum. Following the BJP s defeat in the May 2004 general election, Mr Vajpayee is now the party s chairman, a newly created and largely symbolic position. Likely to act as an elder statesman guiding the party. Abdul Kalam President of India, and founding father of India s nuclear programme. A Muslim, he is widely respected. Country Profile The Economist Intelligence Unit Limited 2004

19 India 15 Somnath Chatterjee Lok Sabha speaker. 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 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 Relations with Pakistan look a little brighter India became independent in 1947 at the start of the cold war. The prime minister, Jawaharlal 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, instead following a policy of neutrality between the two blocs. Pakistan meanwhile joined the USled 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 tried to build 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 greater interest in India. The 1998 nuclear tests caused a glitch in the process, but it has continued nevertheless. The US and Indian armed forces recently held limited joint exercises in India. Meanwhile, India has stepped up its military expenditure considerably in the past five years. India has fought three wars with Pakistan and one with China since independence. 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 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 The Economist Intelligence Unit Limited Country Profile 2004

20 16 India 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 of 1998, 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 banned some terrorist organisations operating from Pakistan, many of which renamed themselves to evade the crackdown. India gave General Musharraf a list of 20 wanted terrorists; they including Sikhs who had taken refuge in Pakistan in the 1980s, and also Dawood Ibrahim, the Mumbai smuggler thought to have moved to Karachi and Dubai after the bomb blasts in Mumbai in 1993 were linked to him. Pakistan refused to hand them over. After the aborted attack on India s parliament in December 2001, India identified the attackers and their handler as Pakistanis. India reduced diplomatic representation in Pakistan, suspended bus, train and air services, and stopped Pakistani overflights. The number of terrorist attacks in Jammu and Kashmir increased in the next six months, and in early 2002 both countries moved troops to the border. In October 2002, however, the People s Democratic Party (PDP) was elected to government in Jammu and Kashmir, forming an administration with the support of Congress. The PDP is committed to reconciliation, and at the invitation of the new chief minister, Mufti Mohammad Sayeed, Mr Vajpayee addressed a public meeting in Srinagar in April 2003, when he extended the hand of friendship to Pakistan. In November 2003 India matched Pakistan s unilateral offer of a ceasefire along the LoC in Kashmir. The offer followed measures announced unexpectedly by the Indian government to improve ties with its neighbour a month earlier. In December 2003 India and Pakistan then agreed to resumed air links and to allow overflights, both of which had been suspended following the attack on the Indian parliament two years earlier. A groundbreaking meeting was also held between the Indian government and moderate Kashmir separatists in December 2003, marking a new chapter in the 14-year stand-off between the Indian government and the Kashmiri separatists. In February 2004 formal peace talks over the disputed region of Kashmir were held in the Pakistani capital, Islamabad. Both sides agree to hold further negotiations in May or June, following the Indian general election. The situation in Kashmir remains volatile. Country Profile The Economist Intelligence Unit Limited 2004

21 India 17 At the end of May 2004, an explosion of a landmine planted by Islamic rebels on a key Kashmir highway killed 28 Indian soldiers. Relations with China remain delicate Bangladeshi migrants cause concern A neutral approach to Sri Lanka India s relations with China are also delicate. In 1957 India discovered that China had built a road across what it regarded as the north-east corner of Kashmir. (There was no administrative presence in this arid desert tract, so that the road was not immediately noticed.) China rejected India s territorial claims, and a series of violent clashes between border guards took place over the next five years. In 1962, after a particularly bloody clash, Mr Nehru ordered the army to throw out the Chinese. The army was poorly equipped and inadequately trained for mountain warfare, however, and whereas the Chinese had built roads to the border, the Indian army had to ascend along mule paths. The Chinese army dealt it a crushing defeat, but then declared a ceasefire. The defeat has made India circumspect. Despite the fact that China has a military alliance with Pakistan, and has given it considerable military assistance, the Sino-Indian border has been quiet for 40 years. In the 1980s the two countries began talks to demarcate their frontier, although the work has progressed only slowly. There have been several high-level visits since 1993, when the Indian prime minister, Narasimha Rao, visited Beijing. In June 2003 India and China reached a de facto agreement over the status of Tibet and Sikkim (whose accession to India in 1975 China still refuses to recognise officially), in a crossborder Sikkim-Tibet trade agreement. Significantly, bilateral trade between India and China has increased sevenfold since the two countries signed a freetrade agreement in February China is now India s sixth-largest export market, and ranks third as a source of Indian imports. The 1971 India-Pakistan war ended with the surrender of Pakistan s entire army in the east and the establishment of Bangladesh as an independent state. Relations between India and Bangladesh are nevertheless close, if not particularly friendly. Agreements between India and Bangladesh to share the water of the Ganges and to extend transit rights to Indian goods have bolstered links between the two countries. The Bangladeshi political scene is polarised between the heirs of those who fought for independence from Pakistan on one hand, and the pan-islamists, to whom the present governing party is close, on the other. India has recently protested strongly against the alleged infiltration of Bangladeshis, who enter India in search of work. India is Bangladesh s closest source of many goods, especially yarn for its export-oriented textile industry. Mrs Gandhi aided Sri Lanka s Tamil separatists in the early 1980s, but, in an about-turn, her son Rajiv sent the Indian army to help Sri Lanka subdue the Liberation Tigers for Tamil Eelam (LTTE). After the Indian forces received a bloody nose, the next prime minister, V P Singh, withdrew them. In May 1991 an LTTE suicide squad killed Rajiv Gandhi. Since then India has steered clear of Sri Lankan affairs. As Sri Lanka has become more confident of India s neutrality, relations between the two countries have improved. Sri Lanka has built up Colombo into a transshipment port for imports destined for minor Indian ports. After Norway arranged a ceasefire between the Sri Lankan government and the LTTE, both sides asked for India s involvement, but the The Economist Intelligence Unit Limited Country Profile 2004

22 18 India Indian government is wary of doing anything that would imply a recognition of the LTTE. The nuclear issue The armed forces India conducted its first atomic test in 1974, after which Pakistan embarked upon its own nuclear programme. By 1994 it was widely accepted that Pakistan had acquired both the atom bomb and Chinese-supplied ballistic missiles. India has developed its own intermediate-range ballistic missile. In 1998 India tested nuclear devices, and Pakistan followed suit. The US president at the time, Bill Clinton, tried to persuade India to sign Treaty on the Non-Proliferation of Nuclear Weapons (NPT) and the Comprehensive Test Ban Treaty (CTBT). However, India s political establishment regards the two treaties as biased, and hopes of Indian participation have receded. India maintains the second-largest army in the world, with total armed forces of 1.33m active servicemen and first-line reserves of another 535,000. However, its soldiers are poorly equipped, particularly for the demanding conditions faced in Kashmir. The army has a strictly non-political role, although the armed forces are often called upon to help beleaguered police forces in areas facing secessionist movements, such as Kashmir and the north-east. Defence expenditure is likely to approach 3% of GDP in 2003/04 and, in view of tense relations with Pakistan, is likely to remain high. Military forces, 2003/04 India Pakistan China Army Personnel 1,100, ,000 1,700,000 Main battle tanks 3,898 >2,368 7,180 Navy Personnel 55,000 25, ,000 Frigates Submarines Air force Personnel 170,000 45, ,000 Combat aircraft >1,900 Source: International Institute for Strategic Studies, The Military Balance 2003/04. Security risk in India Armed conflict India has fought three wars with Pakistan two over the disputed territory of Kashmir and one during Bangladesh s war of independence as well as a major skirmish in Kargil in 1999 between Pakistan-backed militants and the Indian army. Shelling along the Line of Control (LoC), which divides Indian and Pakistani Kashmir, is commonplace. India accuses Pakistan of giving military backing to Kashmiri separatists and Islamic militants fighting against India in Kashmir, but Pakistan claims only to give moral support to the insurgents and accuses India of repressing Muslims in Kashmir. Tensions between the two nuclear powers have been high since an attack on India s parliament building in December 2001, which India blamed on Pakistani-based Country Profile The Economist Intelligence Unit Limited 2004