<html><body>A Change of Guard in India: The 2004 General Elections and After June 3, 2004 Unedited transcript prepared from a tape recording <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="25%"> 1:45 p.m.</TD> <TD vAlign=top align=left width="75%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 2:00</TD> <TD vAlign=top align=left width="25%"> Panelists:</TD> <TD vAlign=top align=left width="50%"> Walter Andersen, SAIS, Johns Hopkins University</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="50%"> Desmond Lachman, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="50%">Joydeep Mukherji, Standard & Poor's</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">  Moderator:</TD> <TD vAlign=top align=left width="50%"> Gautam Adhikari, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 3:15</TD> <TD vAlign=top align=left width="75%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: MR. ADHIKARI:  Good afternoon and welcome to the American Enterprise Institute, to our afternoon session on a Change of Guard in India.  We're going to discuss the 2004 general elections that were recently completed, and what might lie ahead.  We have a very distinguished panel here. I'm Gautam Adhikari, by the way.  I'm a Visiting Fellow here at the American Enterprise Institute, and I look after issues connected with South Asia and U.S.-India Relations. We have Walter Anderson, who is Associate Director of South Asian Studies at Johns Hopkins University, the School of Advanced International Studies.  Walter has also been Chief of the South Asia Division in the U.S. State Department, and he has held other key posts in the State Department and has been posted to New Delhi as Special Adviser to the Ambassador in the U.S. Embassy in New Delhi. Des Lachman is a Resident Scholar at AEI, whose research focuses on currencies, emerging markets, issues connected to globalization, and Des has also been a Deputy Director in the IMF, and has been Managing Director in Chief Emerging Market Economic Strategies at Salomon, Smith & Barney. Joydeep Mukherji is from Standard & Poor, where he's Director of Sovereign Ratings.  He's worked extensively on both China and India. Before going to the panel, I'll do a little more than just moderate here.  I will try to give an introductory PowerPoint presentation on what the elections threw up and a very quick run-through, what we might expect from the new government. First of all, these are the party positions as they exist in the Indian Parliament right now.  The key here is to look at the Congress/UPA slice up there, which is 219 seats, and the BJP/NDA, which is the main opposition party, that's got opposition coalition.  I deliberately use the word "coalition" because it's really one coalition has been replaced by another.  It's not just the BJP being replaced by the Congress and that's a very key point in trying to understand how the Indian system operates these days. Now, in that muddle up there beyond the two main blocks, there are groups of parties and there are parties.  The left combined, for instance, has 62 members in the 543 Parliament of the lower house of Parliament, which is the key one.  And this left combined is going to be an important supporter of the Congress United Progress Alliance, Congress-led Alliance from the outside.  They have decided not to joint the government, but they will support it from the outside. When we say "left" in the Indian context its communist.  It's no beating around the bush there.  They are Marxist parties mostly.  They have agreed to occupy the Speaker's position, so the Speaker in the Indian Parliament right now is a member of the communist part of India, Marxist. Now, if you will recall that it was widely assumed by the media here as well as in India and other parts of the world that the BJP and NDA will romp through and have a fairly easy victory in these elections.  Well, that's not what happened.  In fact, the opinion in exit polls had said that the BJP and National Democratic Alliance would actually score well below what they did in 1999, which is when they got 298 seats.  You need 272 to cross the halfway point in the Indian Parliament, and they had 298 which was a reasonably comfortable majority.  The expectation was that even though they were expected to score well below that, that they would somehow scrape through and form the government.  The key question that in my view at least was not asked is that why were these figures lower?  Why was the BJP, after five years of supposedly shining, why wasn't it actually improving on its seat performance, but why was it losing? Anyway, the reason I think--as I say, wasn't the economy stupid(?)--because the economy really did well in that final year of the BJP's five years in power.  The first four years were kind of average.  A little below 5 percent was the average rate of growth from '99 to the final year, and the final year it jumped to about 8.2 percent with the last quarter being about 10.2 percent, which was remarkable. I think the reasons can be divided into two categories.  There are many reasons, but there are two categories.  One is that as in this country, so in India, so everywhere, every large country, all politics is local, and a lot depended in these elections, and as depend on any elections in India since 1989 when there has never been anything but a coalition in power, there's been no single party majority in the Indian Parliament since the elections in 1989.  The alliances struck by the BJP and the Congress were key to understanding perhaps why one side lost and the other won.  I wouldn't go into details.  I think Walter Anderson will tackle this issue much better in a moment. Take the cases of two south Indian States, Tamil Nadu and Andhra Pradesh, which are both fairly large states, and between them they throw up about 81 seats to the Indian Parliament.  The BJP didn't contest any seat in these two states.  They had allies regional allies.  In Tamil Nadu the BJP regional ally got no seats at all, and in Andhra Pradesh they got just six, which was of course a bit of a surprise, but they got just six.  If in just these two states if the BJP had in fact allied with the other party instead of the Congress and these horse trading and negotiations were going on till to the last minute, eventually the party that won allied with the Congress and so the Congress did much better.  So coalition politics and alliances were key to understanding how the Indian elections actually sort of--how the Indian voters actually voted.  It wasn't on, I think, on any major single national issue of either foreign policy or economics that captured the imagination of voters at the state and local level. The second point was that, yes, there was an economic issue and the BJP's main slogan was that India was shining under the BJP rule.  The question is:  was India really shining?  It was doing well, still doing well I think, in comparative terms, in comparison to its own previous performance, especially as I said over the last three or four years, but there was a lot of spin which perhaps in the voters' mind stood out against the reality. The reality was that there were certain parts of India which were really shining and still doing very well.  Now, parts which are geographical, parts which can be segmented into, as you break up the economy, for instance if you look at the high-tech sector, certainly.  I mean we all talk about the high-tech sector up here in the United States.  We talk about outsourcing, everybody's worried.  That has been doing extraordinarily well.  The services center in general has been doing very well.  Its growth about over 50 percent of the GDP now is the services sector in the Indian economy, and the high-tech sector has also been performing extremely well in terms of exports.  But it employs just about a million people.  I mean in the official registers in India there are 40 million unemployed, so the high-tech sector is not really a job generator or an employment generator, and it is restricted to a number of cities, most famous of these of course Bangalore and Hyderabad.  Hyderabad is often called "Cyberabad" on that account. I'll just go through these minor factors very quickly.  The BJP also lost as a party while the Congress gained.  Congress did not gain in number of votes, not at the BJP, but it did gain the number of seats.  The BJP lost a number of seats as a party, that is, apart from the alliance. Secondly, the BJP was unable to expand its base.  It remained a regional party essentially of North India, though it did surprisingly well in one southern state, Karnataka, but that was mainly I think because of a good alliance partner that it had, and some other factors.  It also lost, in my view, ideologically because in the key state of Gujarat, where Hindu-Muslim riots have taken place a couple of years ago, and on the heels of which there was a BJP Government that was--that had been swept into power, riding we presume on popular sentiment, but in that state, out of 26 parliamentary seats, this time the Congress caught 12, which is double its share of what it go the last time, and that was clearly a vote against the BJP from that state. It's also perhaps true that in the largest state in the country, Uttar Pradesh in North India, Muslim votes rallied against the BJP, which led to one regional party there to support the Congress, and they're still supporting the Congress from the outside, even though Mr. Vajpayee himself personally tried to strike an alliance with that particular party, the Samajwadi Party, as they call it, because they have a very strong Muslim support base, but they could not go with the BJP, and I think by and large, Muslim votes in Gujarat, in Uttar Pradesh, and surprisingly in the town of Hyderabad, where the ruling party didn't do so well, perhaps also be the Muslims did not vote for it.  I'll skip over the rest. Now, very quickly, the expectations, I think, as far as the economy goes, I would expect the reforms to continue, both the Prime Minister, Mr. Manmohan Singh and P. Chidambaram, the Finance Minister, are renowned reformers.  Manmohan Singh virtually started the reform process and Chidambaram is credited with having presented one of the most revolutionary budgets in 1996.  The dependency factor here I'm talking about is the support of the communists from outside.  The communists depend on trade unions.  The largest trade unions in India are affiliated to the Communist Party and one to the Congress Party, and therefore issues like labor reforms and privatization will have some problems.  But then the Communist Party also rules certain states, where they're inviting foreign investment, so I'm not sure that they would go at least in the immediate future, at least for the next two years, I hope, they will not try to pull the rug from under the central government because they would also not try to do something that would scare investors, domestic as well as foreign in their own states, such as West Bengal and perhaps Kerala in the future. In foreign policy I expect that it would be United States.  The momentum in the relationship has acquired a critical mass in economic as well as in strategic ties.  The talks between the two sides have been institutionalized in a group called the Defense Policy Group, which is meeting as we are talking, and the meeting's going on with the new government.  Perhaps in terms of rhetoric and idiom, the new foreign minister in the Congress government and the Foreign Ministry in general might talk a little more in terms of multilateralism as different from unilateralism, and--but overall I don't expect any dramatic changes in the U.S.-India relationship. As far as Pakistan goes on two fronts, I think the peace talks will continue, and there has been confirmation of that.  There was an official level meeting that was supposed to take place immediately around the swearing-in of the government time that was postponed, but it's been rescheduled and the two sides are going to meet again formally towards the end of June. And the dialogue with the Kashmir militants and separatists, which was also started by the BJP government, is likely to continue.  There might be problems with the BJP which is now in opposition, which might now scream saying that they are giving away too much now that it's not in power.  And there could be a problem from Pakistan because if at any point of time it is seen that the cross-border terrorist activity goes up, and they usually tend to go up in summer when the snows have melted in the Kashmir mountains, then that could be derailment of the process. On China, I think there will be a widening and deepening of trade and a dialogue.  On Russia there's a tremendous dependence on defense, but there's also the future of oil supplies that has to be kept in mind.  On East Asia I think India's policy is likely to continue to pursue the policy of look East, which was actually started by the Congress government in the early '90s. I'll just very quickly talk about Israel briefly here because there has been a--during the BJP government's five-year rule, there was an intensification of the Israeli-Indian relationship in intelligence cooperation as well as in defense cooperation, and Israel today is the second largest defense supplier to India after Russia.  But I would expect that the new government would probably continue that policy, but with perhaps more verbal support for the Palestinian cause which is also dependent on, I think to an extent, on the Muslim support base in India of the ruling coalition. I'll stop there and I will invite Walter Anderson to give you an analysis of the political situation as he sees it. MR. ANDERSEN:  Thank you, Gautam.  You know, your point about the polls, maybe the trends were in the right direction, but they were all off, all but one or two.  But I recall the evening before the election you and I were at a party at someone's house who's in the audience here, and I think you were the closest to--of all the people who were giving wise opinions, yours was the closest to the ultimate results of what happened, and it was like, oh, well, they may lose 10 or 15 or maybe 20 at the most, but they'll certainly--the National Democratic Alliance will surely come up with 50 to 60, and you were actually saying, no, I think it will probably get considerably less than that.  So I don't know which pollsters you were looking at, but they were the right ones. MR. ADHIKARI:  Darjeeling tea leaves. [Laughter.] MR. ANDERSEN:  There you go. I want to talk a few minutes about the impact of the elections on party politics and only briefly get into the vote, which we can talk about later, and I think you gave a good summary of what happened.  I don't disagree with any of it.  I want to first identify some of the factors I think that will shape party politics in India, and then go into the three sets of parties that I plan to address.  One, of course is the Congress, which is now the plurality party in the Indian Parliament, but far below a majority, in fact, considerably further below a majority than was its predecessor BJP Party when it led a coalition, because the BJP had approximately 40 more seats in Parliament than--and led a coalition--than does the Congress today.  The second will be the losers, the BJP.  How is this election likely to affect their behavior.  And thirdly, the regional parties, often the overlooked factor in Indian politics, and one should not overlook them. We have tended to look at the two national parties, the Congress and the BJP.  The regional parties, over the last six elections, have incrementally gained both parliamentary seats and popular support at the expense of the two national parties including this most recent one, and they are a critical factor because they're growing strength means that the future of Indian politics is coalition politics, and whoever wins in India are going to be parties which can put together good coalitions, and I totally agree with you Gautam, I think the secret in this election was that the Congress, ironically, the party which had not been a party of coalitions and had been accustomed to ruling on its own for 50 years, put together a better coalition than did the BJP.  I have a little difference with you on Uttar Pradesh as to what happened, but I'll get it either in the discussion or here. The factors I think that are important to consider how parties will react to the elections.  First is the fragmented nature of the results.  The very fact we have a Congress led coalition underscores the fragmented vote in the recent Indian elections, and these elections, the two national parties, the BJP and the Congress, got almost the same number of parliamentary seats, 145 for the Congress and 138 for the BJP.  However, the BJP came in second in considerably more constituencies than did the Congress, and that's an important consideration to keep in mind, particularly in UP, because had the BJP had an alliance with the Bahujan Samaj Party, which they had been talking with and then pulled out of because Kalyan Singh, a former allied from a peasant caste said, "I won't support you in this state unless you cut off links with the Bahujan Samaj Party," and they did.  There was no chance of them allying with the Samajwadi Party, but had they allied with the Bahujan Samaj Party, the estimates are that the two, of the BJP and the Bahujan Samaj Party would have gained 60 or the 80 seats in UP.  That would have given them a plurality, which meant that they would have been the first to choose a government, but they didn't do it.  Very unwise, a very poor choice. It's interesting if you look at the popular vote of the two alliances, the BJP alliance and the UPA alliance.  The BJP-led National Democratic Alliance got more votes.  Yes, it got about 1 percentage more votes than did the other alliance, but it was the way they would divide it up across the country.  As we all know from the last U.S. presidential elections, you know, a little difference one way or the other can make a big difference nationally.  Mr. Gore could probably spell the details, spell that out with great detail for you.  But the BJP alliance also got more votes than did the other alliance. The second factor that's going to determine politics in India I think is the fact that this is a minority government dependent on outside support.  Contrast this with the previous government, which had at one point had 303 seats of the 273 that's needed, so it was well over what was needed for a majority within the coalition.  This coalition has only about 215.  It's well short of a majority and depends on outside support to keep in power.  I think that's going to be a second factor in determining party behavior. The third is that you have very important state assembly elections coming up, and those elections will have an impact, particularly on Congress allies who probably will not want to rock the boat before those elections are held.  For example, I think the elections in West Bengal 2006, I doubt if the Communists want to upset the political situation in Delhi before 2006 because they want to do well again in state elections.  And it's important--here's where the state parties are important.  For the state parties, state elections are more important than national elections in many ways.  And so they are going to be concerned, to a large extent, on how well they do at the state level, and that's because of a central point I'm trying to make here.  I think power is devolving to the state level in India.  It's also devolving within political parties to the state units of parties, and that includes the Congress as well.  At least that's my argument. The fourth factor is the quality of leadership.  I think it's too early to speculate, but there's a wonderful cover of this issue of the Economist which some of you may have seen.  It's Manmohan Singh, the new Prime Minister, with a cell phone to his ear, and it says, "Who me?"  Asking about his choice, very surprised choice as Prime Minister. Recall that when the BJP-led coalition won in 1999 the feeling was, oh, this is not going to last 5 years.  It's got all sort of problems, internal domestic problems.  It's got conflicts between the pragmatists and the Hindu hard right--in fact, I think that was its greatest problem--and other problems, and it won't last.  But it did.  And it did because it had a very savvy Prime Minister who was also popular.  Every poll--I'm almost reluctant to mention what polls say any more--every poll indicates the Atal Behari Vajpayee was by far the most popular politician in India, and that includes the most recent polls on the eve of the elections. You had a popular Prime Minister, who was very savvy, who had spent 50 years in party politics, and knew how--you know, it reminds us of some of the old southern politicians on Capitol Hill.  I mean they know exactly how things operate, and he knew it did too. The question is:  will Manmohan Singh and Sonia Gandhi prove to be as politically savvy as Atal Behari Vajpayee and his deputy, who had also spent 50 years in politics, L.K. Advani? Let me start with the losers, the BJP.  There are--I'm simplifying things now, but there are two large divisions within the BJP which reflects divisions within that larger family of organizations with which it is attached, the Sangh Parivar.  And I won't go into that.  We can talk about that later if you'd like to.  Now, the first are the pragmatists, and it's led by figures like Atal Behari Vajpayee, and their goal has been, to a certain extent, to dilute the Hindu nationalist cultural agenda to maximize support and preserve the National Democratic Alliance.  Major theorists of Indian politics like Lloyd and Susanne Rudolph, who we heard of the other day at that conference, Yugindi Yadav [ph], in India, who argue that no party who aspires to national power in a country as socially complex as India can do so unless they tack toward the ideological middle, and I think that's what Vajpayee and others had been doing to stay in power. On the other hand, of course, there's the Hindu hard line, which wants to revert to the traditional Hindu agenda and particularly the cultural agenda, and they have been arguing since the election, particularly the Vishwa Hindu Parishad, which is an old radical of them all, that the reason the BJP lost, it was unable to mobilize Hindu support, and Hindus are 82 percent of the population, and the RSS, of the Hindu right didn't get out and mobilize the votes.  Now, I'm not sure either of those two propositions are true, but that's what they're arguing. The second big division within the BJP is between the economic globalists, and the Prime Minister was part of that, and those who oppose globalization on grounds that it undermines national sovereignty and national culture.  By and large these two sets of group coincide.  The little India Hindu hard right are together.  In fact, if you hear the anti-globalists, they sound like the old left.  The Communists and the anti-globalists, particularly the labor union affiliate of the BJP, sound very much alike, and I should have brought--I have the most recent edition of the Bharatiya Mosdusun [ph]--that's their labor union affiliate--and the Chief Minister of West Bengal, a Communist, gets much more praise for his policy stands than does former Prime Minister Atal Behari Vajpayee.  Do you see a problem developing within this group of organizations?  Yes, I do see a problem developing. So far, at least within the BJP, it looks like the pragmatists are holding firm.  For example, no senior party official at the national or state level, even in states where the BJP has done very badly, have resigned, and most of those officials were pragmatists, even though the Hindu hard right is calling for their scalp.  In fact, one of the senior figures in the Vishwa Hindu Parishad, said before the elections, but after the elections has said it even louder, that Atal Behari Vajpayee is not a Hindu.  I'm sure that's come as a surprise to everybody, not the least of which is Atal Behari Vajpayee, I'm sure.  He had some doubts about L.K. Advani.  Now, that should raise eyebrows as well. The other thing is, reflecting the pragmatism, the continue domination of the pragmatists, is the official explanation for the defeat has revolved on tactical reasons:  over confidence, bad alliances, and not on ideological grounds. Third, the leadership is trying to hold a National Democratic Alliance together, and it has held.  None of the 21 parties of the National Democratic Alliance have jumped ship, none of them.  And since the defeat they have continued to meet with each other. Now, what factors are working for the continued domination of the pragmatists?  I think there are a couple.  First is the strong belief in the BJP that there's going to be another election, that the internal contradictions in this coalition will face elections.  Secondly, there are upcoming state elections in which the NDA allies want to maximize support, and third is the relatively poor showing of some BJP hard line activists like Modi [ph] in Gujarat that you talked about, and some others as well. And finally, there's the widespread perception--though I'm not sure it's true, but nevertheless it's a perception, that the minorities voted strategically to defeat the BJP and the allies, and Steve Wilkinson, for example, at North Carolina, highly doubts it.  He said the figures just don't show it.  Anyway.  But it's believed.  Perception counts. Let's talk about the Congress.  The Congress has always been a patronage organization, and it has held together by the ability to give jobs to people.  It is in much less a good position to do that today.  For one thing, the reforms of the 1990s, early 1990s, spearheaded by the now Prime Minister Manmohan Singh, took away man of the patronage possibilities that the Congress had.  The second thing is it is in such a weak national position that it dare not try to chastise either state leaders or allied partners for fear that they might withdraw support and bring the government down. All of this, in my view, has laid the basis for stronger Congress chief ministers and stronger allied partners, and if you have any doubt on that, look at the new Congress Chief Minister of Andhra Pradesh.  His first public statement was to declare that there would be free electricity to all farmers, even though I am told and the press has reported, that Manmohan Singh and Congress people asked him not to delay making any such announcement until they talked about it.  Did he do that?  No.  He went ahead and made the statement and is sticking to it.  Well, his neighbor, Jila Lita [ph], who heads a party that did badly in the recent parliamentary elections, three days later announced she was going to give free electricity as well, because she has some state assembly elections up, and she thought, well, if this guy in Andhra Pradesh did it and maybe gets away with it, she can do it as well, and I think she will get away with it too. Finally, let me say a few words about the parties that I say have been the big gainers over the last several elections, the regional parties.  The regional parties have been remarkably cohesive, and I think they've been remarkably cohesive because their vote has been rooted in certain social groups.  Let me give you the example of the Samajwadi Party you talk about.  The social group in which it is rooted are the Yadavs, the bullock capitalists that some American scholars had talked about, peasant caste.  The Bahujan Samaj Party has rooted in the Dalit, the so-called untouchables.  This has given those parties a strength which it's hard to break, and their vote has been remarkably consistent.  A slight shift one way or the other has meant victory or defeat, of these elections showed. But nonetheless if you look at the vote itself, these parties have been remarkably stable, and they will continue to do so.  My bottom line, Indian politics are decentralizing and I think the process will continue and these elections will hasten the process. MR. ADHIKARI:  Thank you very much, Walter. Des Lachman. MR. LACHMAN:  Thank you.  I just want to thank Gautam for inviting me to this seminar, and what I want to talk about is not the politics but I'd rather talk about the economics, even though, of course, the politics has got a clear bearing. And I'd want to be putting the economics perhaps in a little bit more of a global context, and ask what really can one expect from the new government if you look at the five-year term?  The indication that we've got in terms of economic policy isn't particularly clear.  It's something called the common minimum program, which I guess one should be looking at it as a bit of pamphleteering after an election, giving some guidelines.  But what they are talking about is trying to get growth in India to something like 7 to 8 percent, and I think that were they successful in that regard, you know, bringing India's growth more towards Chinese levels, which should be feasible, the would be addressing over the long term some of the problems, the economic problems that Gautam referred to, high levels of unemployment, sectoral problems within the country, regional problems in terms of economic performance. Now, 7 to 8 percent growth is above the 5 to 6 percent growth that we had during the last decade, so that really would represent a marked acceleration of growth, and clearly that would be to the good.  On the encouraging side, as Gautam mentioned, you've got reformers in the position of the Prime Minister, the Minister of Finance, other ministers, who have got a good track record in terms of reform, and some of the statements that are being made are encouraging. On the negative side, as Walter Andersen's alluded to, you know, you've got parties within the coalition who aren't too enthusiastic about globalization or about economic reform, to say the least, and the document reflects that, that certain concessions made either to the rural sector or to the urban poor, and there are indications that they're not going to be wholly behind the reform effort. I guess what I'm concerned about is not simply on the reform side, but I'm worried about India's chronically weak public finances, and I don't see anything that is really addressing what can be the Achilles heel of the Indian economy.  It's been the Achilles heel before.  My expectation when I see something unsustainable, I always like to approach Herb Stein, who used to work here.  He said when something can't go on forever it generally doesn't, and you know, I would add to that that it often ends in tears.  What I worry about in the   (?)   program is that I see that certain expenditure commitments appear to be being made to education, to health, to employment, that all have got a price tag, but you know, one doesn't see exactly how that is going to be financed. Let me just confine the remainder of my remarks to two areas.  One is the growth question and the second would be the public finances.  Over the past decade, as I mentioned, India's growth picked up to 5 to 6 percent.  Most people would ascribe the better performance over the past decade that it owed to the economic reforms that were undertaken by Manmohan Singh following the 1991 crisis, and if India is to really get to a high level of growth, one would suppose that they really have got to deepen that reform effort. It is true that, as Gautam mentioned, growth the past year was very rapid.  We had 8 percent growth that picked up in the first quarter to 10 percent, but I would stress that there are very many transitory factors that aren't likely to persist that explain at least part of that growth performance.  The one is--on a domestic side, India had a good monsoon the past year, so agricultural production, which still is significant in India, picks up from 2003 and that boosts the overall growth figure.  Aside from that, global conditions couldn't be better for India as well as for the rest of the emerging markets.  I'm thinking about very low interest rates in the United States, in Europe, that encourage a flood of capital that goes to India, strengthens the external position, boosts the capital account, increases international reserves, and feeds liquidity, which presumably the Reserve Bank of India at some stage is going to have to deal with. A third aspect that India's benefited from that, you know, if you look forward, it's unlikely that that's going to be prevailing, is cheap energy prices.  You know, we've just seen oil prices go up by something like $10 a barrel over the last month or two, you know, whether or not that gets sustained, it's unlikely that we're going to see cheap oil.  And we've got the prospects that China might be in for a hardish landing, and that could be a drag on Asia in general and India in particular. If one asks one's self from a long-run point of view, how is India going to be getting towards the 7 to 8 percent, I think it's worth making a comparison with China.  When I look at the figures on India and compare them to China, I think India shows up poorly in a number of respects, and I think that those are the kind of areas that have to be really addressed, that when one looks at the overall level of investment in India, something like 23 percent of GDP, it's barely a half of that which China has.  You look at foreign direct investment; India has something below $10 billion a year, China is attracting something like $50 billion.  The degree of openness of the economy is another area where one sees a difference, and the size of the industrial sectors. All of this leads me to believe that one really does have to pursue reform that is going to be making one close those various gaps, you know, if you realistically are going to be growing at 7 or 8 percent.  So what I'd want to be seeing is I'd want to be seeing the public sector finances attacked properly, labor restrictions addressed, that the ideal of restricting labor intensive industry for small firms that has to be dealt with.  Privatization is another area, and I think that the signs there aren't too encouraging.  I would think that right now, with the external sector being pretty strong, this is the time that you would really want to see a reform effort.  But what I hear on the political side doesn't give me much hope. Just the last point I'd like to make is just on the issue of fiscal vulnerability, and I think that's--my experience with many countries is that countries can get into a rather serious problem if they don't have their budget properly under control, irrespective of what's happening on the external sector.  And in that regard, it's just striking that in India, despite the reform effort that began in 1991 when the prices in 1991 was in large precipitated by a budget deficit that was 9-1/2 percent of GDP, you know, if you looked at the general government.  Since 1998-99, we've been having the general government budget deficit in the range of 10 percent, and it's showing no signs of slowing down. What does this lead to?  Well, it's led to the public debt in India, which used to be, 5 years ago, something like 58 percent of GDP, is not sitting at something like 85 percent of GDP, and if we include the contingent liabilities and the guarantees and the like, we're at 100 percent of GDP, and if that isn't bad enough, you know, we're on a trajectory for this to go to the stratosphere.  I think that there are only two possibilities, you know, in my mind, either that this leads to a crisis at some point.  I don't think that the crisis is anytime near because the external situation is rather strong, but what I do think is that the alternative is likely to occur, India's likely to be saddled with very big public deficits.  What this is likely to do is it's likely to crowd out investment, it's likely to keep interest rates high, it's likely to keep the bank saddled with a lot of government paper so they can't really channel the savings to the investment that really make a difference. My conclusion is that high growth, low interest rates, aren't going to get India out of its fiscal mess, that really there's only one to go, and that is to be either raising taxes or restraining expenditures.  And it would seem to me that it's better to do this at a time when you're not in the middle of a crisis, you know, so that you can do it in an intelligent way, you can make your choices in a concerted manner, rather than face up to the crisis.  And my only hope is that Manmohan Singh remembers what occurred in 1991 and manages to convince his cabinet colleagues on the virtues of fiscal prudence. MR. ADHIKARI:  Thank you very much, Desmond. Joydeep Mukherji. MR. MUKHERJI:  Thank you, Gautam. My work is as a rating agency analyst in Standard & Poor's, and Desmond just described very well why India's rating is low, at BB, because if the fiscal story and the debt story that he just outlined.  In preparing the remarks today I was just thinking about some of the paradoxes of the selection, that here's a country which most people agree has some doubts or hesitations about globalization, and at the same time it voted for a party led by a woman from Italy, and accepted her, at least a large segment of the population accepted her as a leader.  But at the same time, maintains high tariff barriers and other barriers to Italian products or other products.  It's a strange beast in some ways to describe.  There's good news and bad news.  There's a lot of paradoxes. I want to talk about kind of a long-term framework for India's growth story to see what sort of--what has been the story thus far in recent years and which may continue regardless of the developments in politics that Walter described, and then focus specifically I guess on a couple of predictions or forecasts as to what kind of reform may carry on faster and what may not.  These are my personal comments.  I don't speak on behalf of my employer although we have a rating for India.  These are more sort of my personal thoughts. If you go back to 1980 and look at the growth record in India, it's been a rather remarkable story.  The average GDP growth rate for the last 22, 23 years, has been just under 6 percent per annum, which by global standards is very good.  Of course it starts from a very low base.  The other factor is that the growth rate has been remarkably stable.  It doesn't go from minus 1 to plus 12, it tends to fluctuate between 4 and 6, a couple of years it went up to 7.  And during more than half of that period, the country has been led by coalition governments and there have been at least 45, 50 political parties that have been in power during the last 23 years, and almost everyone in the government today inside the coalition or supporting it from the outside has also had a shot at power sometime in the past, either inside or even from the outside like this time around. So in that sense there's a remarkable continuity if you take a medium term view. Now, this growth rate that--this long-term growth rate has to be driven by factors other than just changes of personalities or political parties.  I won't go into all the details as to what it is, but you know, in very general terms there has been a trend towards liberalization, in some ways even started in the '80s, but mainly from 1991 with Manmohan Singh.  And there's also been I think a change in the global economy which has benefited India in the sense that the service sector has taken off, not just IT but many other things, and that was less constrained in India than other sectors of the Indian economy.  There's also a generational change in India that although the previous government and the current government were led by people in their 70s, India has one of the youngest populations in the planet.  More than two-thirds of the population are less than 30 or 35-years-old.  I forgot the exact number.  And that's just had a change in how people see the world, and that change hasn't quite filtered up to the senior levels, but at the ground level, the state level especially, that's come through. A lot of the attachment to the fond memories that the parthia [ph] musdar [ph] sangh [ph] writes in its newspapers or the 70-year-old chief minister of West Bengal likes to say, are not shared by their grandkids, they're just a different generation. Now, there was a hope prior to this election, a hope in the markets and to a large extent in the private sector in India that somehow this kind of record of muddling through, a little reform here, a little bit of growth here, somehow that this was going to change into an accelerated pace, and this hope was bolstered by certain cyclical factors you can say, and maybe some political factors, more structural.  The cyclical factor is basically the good monsoon which boosted growth last year to about 8 percent, and that follows a bad monsoon which kept growth at 4 percent, so we can say on average of 6 percent. But nevertheless, the euphoria that comes from a good monsoon creates perceptions that, whoa, things may actually be changing.  More interestingly, the balance of power within the BJP shifted, the way Walter described, between the different groups.  The reformists seem to have made a comeback in the last six months of the last government's tenure, and the Prime Minister felt secure enough to back them, and they pushed through a few plans and they boldly announced dramatic liberalization which they promised they would do after the election. The euphoria in the business community because of 8 percent growth plus the new political rhetoric coming from the political class that actually went into an election promising lower tariffs and promising to loosen labor laws which the unions oppose, and promising many other things like that, that's the first time that's ever happened in Indian history.  People usually, before the election, just like here, before the election you don't talk about free trade, you know, you pander to your interest groups, that was a kind of a unusual factor and that led a lot of people to think that there might be a breakthrough here.  And then you had the good international situation last year, as Desmond was saying, a low interest rate, a lot of money flowing into India for equity and debt. [Tape change.] MR. MUKHERJI:  [In progress] -- that with stronger political ties there would be more business exchanges and more access to technology. So there was kind of a hope of some kind of a best-case scenario that could emerge from the election.  Well, that's gone now.  So the question is, what kind of scenario is more likely in the next couple of years? I share Walter's skepticism that, you know, they may last 5 years, but this is going to be a wobbly coalition, and we can't bet the house that there is going to be five years.  So that's the first thing to start off with.  If you think you may not be around for a full term, regardless of what your ideological views are and your personal analysis of the situation, which is Manmohan Singh knows the deficit story and the debt story better than all of us, the fact is probably doesn't think he has 5 years to solve the question.  He may not be around 6 months from now unless he makes compromises to keep the government going.  That alone I think is going to have an impact of what kind of scenario is likely to take place. My base case is that it's going to be a muddling through scenario, as India has done for many years, but muddling through in India is not a particularly tragic scenario.  The problem with the muddling through scenario is that it also means muddling through on the fiscal side and the debt story, and I fully share Desmond's concerns on that. But it also means that on the other side, the point I stressed in the beginning, on the GDP growth side, it doesn't require a lot of action for the government to preside over 5 to 6 percent GDP growth.  8 percent, no.  That would require a lot of changes which are not going to happen.  But 5, 6 percent or more likely 6 percent plus, is possible because a lot of the growth is driven by changes that have already taken place in terms of liberalization that's already done or sort of is halfway being done. What we've seen in the last decade especially, with this kind of a muddling through slow reform, is a growing gap between the prosperity of the private sector in India, meaning corporations as well as individuals, even farmers, not just urban middle class people, and on the other side the growing impoverishment of public sector institutions and the public sector in general, be it a government run hospital or be it the finances of a state government or the national government.  So this growing gap between public poverty and private wealth I think will continue, and that does have consequences down the line, but the silver lining in that story is that the private prosperity, the 6 percent growth rate, the IT success story, now the exports of cars and the exports of steel and other products should continue because there really--there are very few obstacles in the political world for that story to continue. The bad news is if you were looking for dramatic changes like privatization, I think that's not likely to happen.  The government came out and said they're not going to privatize except in exceptional circumstances, and some apologists have said, look, don't believe us.  We're lying to you.  Actually we'll do this thing, but just don't believe anything we say.  I prefer to believe them and I think they will not privatize anything significant. And there are other issues to deal with, just the provision of basic public services such as health and education, because what we've seen with this dichotomy between public and private prosperity or impoverishment is that there's a kind of perverse privatization going on in India.  Things that should be given by the public sector like basic education or basic health care, are now being offered by the private sector, even to the poor, because the choice facing the poor is either you get no education for your kids because the government school doesn't work and the teachers don't show up, or you pay some money to get some education so you have some hope for your kids.  So it's a mixed story. But the good story or the good news that could happen is a couple of areas where there might be some progress.  One is trade liberalization, which has not been mentioned by any of the partners in the coalition, and there seems to be a consensus in India in the business community in favor of more trade liberalization, and that may continue. The obstacle to trade liberalization in the past, a couple of years at least, has been the business community, not the Congress Party or the Marxists.  So to the extent the business community is still in favor of it, you may see some progress there which may have an impact on things like the Doha Round and bilateral talks with the U.S. on global trade issues. There's also an area which doesn't get a lot of attention over here, but is very important for India, and that's agriculture.  The liberalization that we talk about in India basically ia liberalization in the industrial sector.  They didn't have much of a service sector policy before, so they didn't have to liberalize it, and that's why it's the fastest growing sector in India in the last 10 years.  But they'd be liberalizing industry.  They haven't touched agriculture.  The last government announced its intentions to touch agriculture.  And there are actually some encouraging signs from the current government, from members of the Congress Party, who want to actually liberalize agriculture and give an agricultural producer the same liberty as an industrial producer to decide what to produce and where to sell.  This may actually happen because some of the state parties that Walter is mentioning, the Bullock Party of the Yadavs, and Samajwadi Party through Pradesh or others, they're what Marxists derisively call the Kulacs [ph].  In other words, farmers who are not desperately poor, and these people have some economic interest in liberalizing agriculture, and there really isn't much ideological resistance to that. That's very important because that's where most people live, and an increase in the growth rate in agriculture, everything else being held equal, probably has a bigger impact on reducing poverty in India than a similar increase in the industrial sector's production or the service sector's production.  Now, that doesn't feed into us in terms of living outside India.  We don't necessarily see that, but if this happens, that you could actually see an acceleration in the rate of poverty reduction in India, and I say "if," but I'm hopeful something may happen.  The other area is tax reform, and I won't get into any detail for lack of time. If I can kind of wrap up on sort of what I see is the base case, the real problem is that you've got a shorter time horizon politically for the his government.  The common minimum program--and I stress the word minimum--the common minimum program was devised after the election by people who didn't think they were going to win.  The last government had everybody inside sitting in the cabinet table, as Walter mentioned.  This government has people sitting outside, inside, people may go back and forth.  There's just a different political calculation there. Those things that already work, in other words, things like IT, things like increasingly some of the special export zones and industrial exports, those things will carry on.  There's no resistance to them, and probably there will be no resistance to further liberalization I those areas.  Those things that require tampering with the patronage network, such as privatization which kills the patronage network, or public sector reform, somehow giving more autonomy to the public sector without actually selling it, those things are just unlikely, not for ideological reasons, but simply because of political calculations. So my base case--and this is what we've been saying to our panicked clients who have been calling the last few weeks asking about India--is that a growth rate of 6 percent per annum is quite plausible this year and next year for a couple of years.  That's not the 8 percent miracle that Indians wanted, nor is it that bad.  The distribution of that growth rate could be better.  I prefer to have agricultural led growth at 6 percent if you're worried about poverty, but at any rate, 6 percent is still 6 percent, and so there's a possibility of muddling ahead.  But the threat that Desmond mentioned in terms of the fiscal story and the debt burden, it's there, it's looming out there.  That has to be addressed.  You can't grow out of it, but because it's not an imminent threat and it's not something that has yet reduced the growth rate, it's very difficult to get anyone to focus on that politically, and I suspect that's not going to change with this government. Thank you. MR. ADHIKARI:  Thank you very much. Thank you, Walter, for your excellent summing up of the political situation, and Desmond and Joydeep for your analysis of what is happening, has happened and is likely to happen in the economic scene. Now it's open to questions.  But just before that I want to just add to something that Joydeep said, that even with a 6 percent average rate of growth in the '90s, India's poverty rate actually declined, according to official figures as well as World Bank figures, by a full 10 percentage points from around 36 percent to about 26 percent of the population, which means lifting 100 million people above the poverty line.  The poverty line, I admit, is not the same as the one you have here.  There it's actually living on one dollar a day.  But still, that's something.  That also has some political complications involved because it leads to rising expectations which may have also, Walter, played a role in the pattern of voting this time. Anyway, it's open to questions.  Yes?  Please identify yourself and-- QUESTIONER:  [Off microphone, inaudible.] Sorry.  I assume you heard most of my-- MR. ADHIKARI:  It's okay. QUESTIONER:  What would happen in India if there were a significant increase in the international interest rate? MR. MUKHERJI:  Probably the impact on India will be less than the impact on most countries, but there will still be a negative impact.  The reason it will be less is that the capital account in India, capital flows, are still restricted.  You have to register and seek permission to bring money in and out if you're investing in debt or if you're making loans.  What that means is basically the private sector savings rate in India--Desmond mentioned 22 percent of GDP--that's largely captive.  That's kept in the country.  Most of it goes, or the financial part of it goes to the banks.  The Indian banks are awash with cash, and more than half their balance sheet consists of government bonds that they buy with their deposits.  And since they're not going to take their money out to invest outside to take care of arbitrage opportunities and all that, nor can average people just send their money back and forth the way they can between Canada and the U.S., there is to some extent a captive source of money.  But it's not perfect.  There is still some room for arbitrage. So the net impact of higher interest rates here will have some impact on higher interest rates in India.  It will have a bigger impact, not so much on the cost of government debt, but on the private sector because a lot of the money that's coming into India, into the market, is--most of it's not going into government, buying government bonds.  It's funding the private sector, and whether it's through equity or debt, and there certainly the cost of capital could increase. So the good news is it's not going to be hurt as much as Latin American countries.  The bad news is it's going to be hurting. MR. LACHMAN:  I guess, you know, what I would add to that is it seems to me that the assumptions on which the budget are based are not very realistic.  I think that what's a bigger issue perhaps than the interest rate--but it's related to the U.S. interest rate--is the rate of economic growth in India.  I would imagine that in a world in which United States interest rates are rising rapidly, it's not going to be that conducive for growth in the whole of Asia, and if the Indian budget is based on an 8 percent rate of growth and we only have something like a 4 or 5 percent rate of growth, I think that the strains that you get in the budget--you know, the revenue collection's already going to be impaired, and this has got a danger in that once your deficit starts rising, then, you know, I think markets could be having doubts.  It would just be increasing the doubts on the sustainability, so, you know, we could be getting into some sort of vicious circle on the budget. But I don't see it as being that imminent.  I see this as just being a slow cancer that is eventually going to cause a problem. MR. ADHIKARI:  The gentleman at the back there. QUESTIONER:  What I've been hearing--and I'm not quite sure who should comment on it--it sounds to me like there may be some real infrastructure strains between the big deficit, lesser openness to privatization--people presumably saw the Financial Times today about the changing conditions on the privatization of the airports.  And I'm wondering if, not in perhaps one or two years, but within three or four years that might start to bite on the growth rate. MR. ADHIKARI:  Let me just clarify.  One point on privatization is that the Prime Minister, soon after being nominated Prime Minister, did say that privatization will not stop as far as loss making industries go.  That's an interesting point.  The point is that most public sector units are loss making.  So if it doesn't stop for loss making, but who will buy them is a different question if you don't sort of package it with some of the more profit making.  But he has ruled out the profit-making industries being privatized. Des? MR. LACHMAN:  No, I think that if you do have a strained public sector, the scope for infrastructure investment is rather limited, you know, that essentially what you've really got to be doing, I would think, is working on enhancing saving from the Indian public, but I think that more importantly, I would say that you've really got to be getting foreign direct investment into this picture, you know, and I think that that really should be what the structural reform program is all about.  You know, that if I look at China, I don't see why China should be attracting $50 billion of FDI on an annual basis for a number of years, and India is sitting around with something like 708(?).  You know, I think that something like that could make a difference. But I don't think in a situation like this, you know, if you are going to be getting growth to be ratcheted up from 5 or 6 percent to something like 8 or 9 percent, I think that, you know, you're not looking for a silver bullet, but you're rather looking for a comprehensive and sustained reform program that is very well directed.  I think that that's the reason that I was suggesting that India might want to take a look at the Chinese experience. MR. ADHIKARI:  In front? QUESTIONER:  [Inaudible], let me have a political question, two quick ones.  One:  In the past India was labeled as a Hindu country or a Hindu party.  From this election where we have the top President is Muslim and now Prime Minister is a Sikh, and   (?)   is a Christian, Sonia Gandhi, and now we have a number of other minorities.  Where do you put knowledge where India's concerned?  What message you are going to have for the west, especially for the western media? Second question is:  U.S. had been dealing with the Congress Party for the last 45 years.  How this Congress Party will be different for this administration and what do you think the relations between the United States and India in the future, under this administration and [inaudible]. MR. ADHIKARI:  Walter, you might like to take that. MR. ANDERSEN:  On the question of how will the world react to the fact that you've got a Muslim President, a Sikh Prime Minister, and a Christian who's head of the Congress Party, I think the world's going to react very positively to that.  You know, the press has reacted well.  I mean this shows the plurality of India and a tolerance in India that you have a situation like this.  My own view is in no way is Hindu culture or religion in any way undermined by this factor. Secondly, how will the U.S. Government react to this government?  It will do like all U.S. Governments.  It will try to serve as good a relationship as possible on areas of common interest, and there will be areas of common interest clearly.  India is involved in globalization.  The U.S. is critically important on that.  We are the world's only superpower, and that's going to count on security issues for India. I totally agree with you.  I think you have to take the common minimum program with a certain grain of salt.  It was rewritten just recently, and I think by a lot of surprised people who didn't expect to be sitting down and writing it again, to release as the common minimum program of a government in power.  And it has a lot of ideological things that sent people up the wall.  For example, it calls Indian workers in Iraq mercenaries.  Mercenaries, can you believe--I mean that's an ideological term.  I would hardly think, you know, it should enter into a document, mercenaries.  And it drops the notion of a strategic alliance between the U.S. and India, which actually had been in the earlier Congress document.  It was dropped in the common minimum program.  In fact, it doesn't really make too--there was not a strategic alliance, nor any likelihood of it coming about any time soon. I think there will be some changes though.  I think India will take a more independent foreign policy line, and it will be I think less supportive of some U.S. security moves.  For example, like the mercenary thing, it's going to be much more critical on Iraq than was the past government, who put relations with India at the top of its foreign policy agenda.  This government talks about multi-polarity and extending relations beyond the United States and all that.  That said and done, relations with the United States will be important. QUESTIONER:  Following up on that, I'm Ira Strauss from Democracy International.  Again, the Chair's comment that things won't change too much in foreign policy are of course reassuring because they've been going rather well, but then there's the point you bring up about multi-polarism or multilateral rhetoric, and certainly in the past, before the previous government, India's habit of reading moral lectures to the United States, even if they were sometimes right, wasn't very good for our relations, and it's improved over the last government. Do you see this reverting--and to what degree--to the past patterns? And then following on that, for most other major partners in the world like Japan, we have the Group of 8 to absorb their multilateral energies.  For India we don't seem to have really anyplace to absorb multilateral energies in a way that works out well for us at the same time.  There is the new Community of Democracies grouping that the AEI itself has promoted.  Do you see any prospect for that?  I'm skeptical, but maybe you see that as a way.  Or there is the idea of a new grouping of partners on the war on terror, such major new partners as Russia and India and America.  Would that be a way of absorbing India's multilateral energies in a way that wouldn't work against us? MR. ADHIKARI:  Let me just take one part of the question, which is that in the Community of Democracies, India's part of the 11-member Steering Committee.  That is the State Department organized, not AEI--proposed, but the State Department.  That's been in existence for two or three years, actually for four years I think.  It's already met in Warsaw and Seoul, and the next meeting is in Santiago.  India was offered the chairmanship of the Community of Democracies, which it declined under the BJP.  Now, whether this government will take it differently, I do not know. On the association with other groups, other countries, well, India and China are a little different, I think, because of the sheer size.  So whether they belong to a group or not is almost irrelevant.  You have to deal with them.  If India especially keeps growing at even a rate of 6 percent--I mean if it touches 7 percent it will double its GDP and will be the third largest economy in about 20 years time.  So that has to be kept in mind, so we have to deal with it.  If it collapses, if it fails, that also is a problem.  We'll have to deal with it, which is very unlikely. So I do not think it's particularly important for India, and I would say in fact there are people in the Congress Party who keep talking about groups like the G-15 and, you know, which nobody's heard about outside that circle.  So, personally, I'm against that kind of grouping all together.  If India wants and ever can become a member of the G-8 to make it G-9, that will be fine, but that's different. MR. ANDERSEN:  In terms of multilateral organizations, there are two.  Though they're often overlooked, they're very important, which the Congress leadership I think supports.  One is SAARC, the South Asia Association of Regional Cooperation, and since at the January SAARC summit, former Prime Minister Vajpayee and President Musharraf of Pakistan kind of made up, and all sorts of things were set in train, of bilateral talks, and the Congress leadership wants to advance with that.  What really underlies it is something fascinating, is that the summit leaders in Islamabad last January in effect said that economics is going to lead the regional cooperation.  This is India's strong point. In my view, in a sense, the regional leaders said, like it or not, you know, we're going to accept a region which India takes the lead role, and it will inevitably will as a country with three-fourths the wealth of the region, it will.  And that's something I think that the Congress would support as well. And then the other one, other two is the Indian Ocean Forum, which is beginning to get established, and I think any Indian Government would support that.  And then there's the Asia Pacific--what do they call that association? MR. ADHIKARI:  There's ASEAN and-- MR. ANDERSEN:  No, ASEAN is one, but there's the Asia Pacific-- MR. ADHIKARI:  APEC. MR. ANDERSEN:  APEC, yes.  You know, part India wasn't [inaudible] as the U.S., in a sense didn't want them to be.  This is kind of internal State Department bureaucratic politics.  The East Asia people didn't want India in and got their way.  I don't think there's such opposition any more.  Then India lost interest.  But India is again demonstrating some interest.  But there's another question.  I'm told that economists, both in India and out, talk about, is do regional associations get in the way of globalization or not. MR. ADHIKARI:  That's Japanese   (?)   keeps talking about that.  It's a very valid point.  And I think we should also add that India is trying to achieve bilateral economic relations with a lot of countries, sort of bypassing the need for joining. But there's the China factor also.  China is not very keep on India joining APEC right now, not just the U.S. A question at the back.  There are two questions at the back and one here.  Can we take all three together, and then perhaps ask you to respond. QUESTIONER:  [Inaudible].  What's new in India-Pakistan relations that most observers seem to agree that the peace process would continue between both countries even after a change of guard in New Delhi? And what are the economic prospects between both countries, and if any country would benefit more, if economic cooperation starts between these two countries? QUESTIONER:  Frank Borne [ph], former U.S. Foreign Service Officer in India.  I'd like the view of the panel on the prospects for a meaningful dialogue between India and America under the new regime, viewing a comparison, the sustained dialogue between Jaswant Singh and Strobe Talbott, which was regarded by many observers as the most sustained dialogue if not the only sustained dialogue between our countries since independence? MR. ADHIKARI:  The last question, the lady here. QUESTIONER:  [Inaudible], Millennium International Consulting.  My question actually is for Mr. Mukherji.  You mentioned that Indian banks are flush with rupees.  So my question is why do Indians consistently prefer to save rather than invest?  And in light of your answer, what future do you see in terms of strengthening and depending Indian capital? MR. ADHIKARI:  Walter, would you like to take the--on the Indo-Pak issue? MR. ANDERSEN:  [Inaudible].  At the specific and immediate level the two political figures, Musharraf and Vajpayee made some compromises.  Vajpayee backed away from demanding that there had to be concrete proof that Pakistan ceased to provide assistance to cross-border terrorism, and Musharraf backed away from the notion that you had to have substantial advances on Kashmir first before anything else could happen.  So those compromises should substantially enable the talks to begin to take place. It also strikes me that in some ways Pakistan may have made more compromises by opening--by agreeing to sort of the proposal for SAFTA, a free-trade zone in South Asia. I was in Pakistan about a month and a half ago, and what strikes me as somewhat different is Pakistani businessmen now, than the last time I was there, seemed to be more confident that they can handle Indian competition, and the argument I kept getting was that we now have a market of maybe 15 million people, but we'll have a market of 300 million people if we have--and so that gives the possibilities of economies of scale. The other one was, you know, will we have a Jaswant Singh-Talbott dialogue again?  I was in the State Department.  In fact, one part of that dialogue I was marginally involved with, and that had something to do with the unique personalities of Strobe Talbott and Jaswant Singh.  I doubt that it will be repeated again.  I mean that was a very unique type of thing, and Strobe Talbott is about to bring out his book which focuses on those talks.  It should be coming out within a month or two. MR. ADHIKARI:  Joydeep? MR. MUKHERJI:  The question was India-Pakistani economic cooperation.  If you look at it from a political point of view, it's very important to break down barriers and all that, and that's how most people look at it.  If you put on blinders and become tunnel-visioned and just look at the numbers, what does Pakistan offer to India, another Uttar Pradesh.  It has the size and market of another Uttar Pradesh, the largest state in India, and no Indian businessman is salivating at the thought of a second Uttar Pradesh. [Laughter.] MR. MUKHERJI:  For many reasons.  So, yes, it's important for India in some ways, but the importance is not really economic.  The importance--I'm not arguing against it.  I'm just saying let's be clear as to why it's important.  It's for many other reasons. And so the impact of such a change--you know, it's the same as NAFTA or say the earlier free trade agreement between Canada and the U.S., the impact of these agreements is always bigger on the smaller partner, and the adjustment is always bigger on the smaller partner.  So the impact will be felt basically in Pakistan, to much less extent in India. On the savings and investment issue, this is a huge topic.  But basically, I mean, if you look around the world, you can come up with economic reasons or institutional reasons why people in this country save more than people in that country, and there's a residual that can't be explained, and has to, you know, boil down to culture preferences or what-have-you.  In general it's not comfortable to say this, but Indians are frugal.  Does that mean forever and ever?  No.  Does that mean they can't be profligate?  Yeah, they can be.  But in general we've seen that in people the same income level, facing the same kind of life in different parts of the world have different savings rates, so one is a traditional Indian savings habit because you have to save for the rainy day.  There's no social security, there's nothing to help you when something goes wrong, and that's still there for most of the population.  So that's one reason the savings rate is high. The other reason is that India has not had hyperinflation like some countries have in Latin America, so you haven't been burnt, and thus you do have some confidence in savings in financial instruments, and you don't take your money out of the country as soon as you can if you're in Argentina, for example.  You have some faith in the Indian system, financial system. Why don't people take those savings and invest them as opposed to buying government debt?  This comes back to the issue of economic reforms.  The cost of capital in India is very, very high for many, many reasons, including some government set interest rates that put a minimum deposit rate int banking system. The net impact of all these policies is that when you're looking at an investment project and you're doing your net present value calculations using a discount rate to see if it's profitable or not, the interest rates you're using to discount the cash flow is so high, most projects aren't profitable.  It's a lot easier buying government debt where it's zero risk if you're an Indian, and no administration hassle or nothing.  And this is unfortunately not even on the agenda of the current government.  It wasn't really on the agenda of the last government either, how to bring down the cost of capital. And this is one of the reasons, although you didn't ask the question, why is industry growing slower in India compared to China and other countries?  I don't think it's cultural.  I think it's the simple fact that the cost of capital in China is practically zero for some people, and it's still cheap for others, and the cost of capital in India is expensive for everyone.  So people just don't invest in industry because it has a long gestation period. MR. ADHIKARI:  Although we must clarify that the cost of capital today is far lower than it was even 5 years ago.  It's less than half for most. With that, we bring this session to an end, and we thank you all very much for coming. [Applause.] [End of session.]</body></html>