- The Washington Times - Sunday, September 17, 2000

In the view of many Washington analysts, China is potentially America's greatest trading partner or most dangerous adversary. But another Asian nation may eventually end up as an equally significant international player: India. In fact, Prime Minister Atal Behari Vajpayee is presently visiting the U.S., mixing an address to Congress with a trip to Silicon Valley.

But India's ultimate influence depends upon its willingness to remove barriers to foreign investment and trade. There are hopeful glimmerings. Last month New Delhi opened up national long-distance services to private firms and relaxed controls over information technology investment.

Moreover, a government-industry experts panel has just recommended that the government relax its controls over home insecticides, currently the toughest on Earth. The rules are obscure, but emblematic of the problem of burdensome regulation in India. Their impact has been to deny potentially life-saving bug-killers to people who face one of the globe's highest rates of tropical disease. The reform proposal now moves to the Ministry of Agriculture and ultimately to parliament.

India's potential is obvious. At current growth rates, it may eventually surpass China as the world's most populous nation. And those growing numbers of people are remarkably entrepreneurial.

Ethnic Indians have made a deep impact on Silicon Valley, accounting for an incredible 40 percent of hi-tech (H-1B) work visas. Many are now setting up shop at home, where Internet millionaires are no longer uncommon.

However, phone lines and per capita internet use remain below that of many other countries, including the Philippines, Indonesia and Pakistan. The only way for India to unlock the full potential of its incipient webmasters is for New Delhi to free its ossified economy.

Modest investment deregulation, tariff reduction, and import licensing liberalization have allowed India to more than double its exports over the past decade. But China, which has reformed more, has done twice as well. American is India's largest trading partner, but in 1999 bilateral trade ran only $12.8 billion, compared to $100 billion with China.

Indeed, foreign investment in India has dramatically declined over the last two years; in 1999 it was only slightly more than half 1997 levels. India draws less than a tenth of the investment that pours into China. Despite some increase this year, major companies are departing: "Most foreign companies are skeptical about India," says C. Srinivasan, country chief for A.T. Kearney.

New Delhi announced in late June its intention to speed privatization of state-owned enterprises. But just days later the government, under pressure from smaller coalition partners, cut by five-sixths the number of firms approved for sale. K.S. Sudarshan, head of a nationalistic Hindu organization whose members include Prime Minister Atal Behari Vajpayee, denounced even the most modest liberalization as "selling the nation" and handing companies "over to foreigners."

More than 250 firms continue to dominate what founding Prime Minister Jawaharlal Nehru called the economy's "commanding heights," including infrastructure, power and telecommunications. Subsidies pervade the agricultural and other sectors; government budget deficits are huge; labor laws are archaic; competition for public enterprises is discouraged; bankruptcy procedures inhibit efficiency; corruption permeates government at all levels.

Less visible but equally serious is a sclerotic legal system. One estimate is that at the current rate it would take 324 years to eliminate today's case backlog.

Then there is regulation. Although the government has eased some restrictions in recent years, it remains unnecessarily complicated to start businesses and market products. India's legendary bureaucracy not only consumes scarce taxpayer resources; it also stifles entrepreneurship and creativity.

Governments in the mid-1980s and early 1990s undertook modest reforms. However, explains economist Shyam Kamath: "The problem with those reforms is that, even though they are radical when compared to the policies of the last 45 years, they are neither comprehensive nor complete." Socialism may be dead, but markets are not yet free.

An example is home insecticides, a mundane product Americans take for granted. However, killing bugs, which often carry disease, is critically important for poorer people living in cheaper housing. And India has the highest rate of tropical diseases outside of Africa, with as many as 10 million cases of malaria alone a year.

New Delhi passed the Insecticide Act in 1968 in response to food poisoning caused a decade before by an agricultural pesticide. At the time, these provisions applied primarily to agricultural pesticides, a limited market. Today the same rules regulate the much wider home insecticides (HIs) market. Any product containing one of 144 listed chemicals must register with the Central Insecticide Board. Products identical with those already registered must still be registered.

A manufacturing license must be acquired from the State Department of Agriculture where the factory is located. Ten states require a special license for out-of-state pesticide makers. Every seller more than 8 million warehousers, stockers, wholesalers, and retailers must apply for a stock and sale license from the District Agricultural Officer for each brand, manufacturer and manufacturing location.

The entire process takes years. Yet licenses are valid for only two years; any product change requires a new license. To obtain a license one must maintain separate stocking facilities and billing records for pesticides, as well as first-aid kits with Atrophine injections. This system is the toughest on Earth.

As a result, fewer than half of stockists have licenses for the full range of HIs. Barely a third of retail outlets handle them. Access is lowest in rural and smaller urban areas.

Only 15 percent of households purchase HIs; Indian consumption lags far behind that of other South Asian countries. Per capita use is 5 times as high in China and eight times as high in Thailand. Purchases in Indonesia run 30 times and Malaysia 35 times as much. Moreover, there are far fewer launches of products and relaunches of improved products in India than in other countries.

Although HIs, like agricultural pesticides, kill bugs, they are very different. For instance, no HIs contain organophosphorus or organochlorine compounds, which were responsible for the 1958 incident.

HI chemicals are also far less concentrated. In fact, salt is far more toxic than many HIs. Nor are these products, which range from aerosols to mats, easy to consume.

U.S. companies, represented by the Household Insecticides Manufacturers Association, have asked the Indian government to simplify registration of and eliminate controls over distribution of HIs. Although HI makers are heartened by the experts group's recent recommendation, the government has yet to endorse the measure, and even then the legislative process could take a year.

Some firms hope U.S. pressure will speed reform, but Washington's wish-list is long: not only eliminating India's burdensome insecticide regulation, but lifting New Delhi's embargo on soda ash imports, reducing soft drink excises, and cutting tariffs on photographic paper supplies.

The next administration could do more to press these issues. Ultimately, however, New Delhi must reform for its own sake. That a third of Indians live in often immiserating poverty is a scandal, particularly given the demonstrated entrepreneurial ability of the Indian people.

Washington can encourage New Delhi to free its people to be productive by offering to open its market. Earlier this year Indian Foreign Minister Jaswant Singh suggested that a free trade agreement with America was worth considering. The U.S. should propose such a compact.

Moreover, the U.S. should eliminate so-called development assistance to New Delhi. India has been on the international dole for decades. Yet upward of $60 billion in foreign aid has not created prosperity in India.

To the contrary, these outside funds subsidized the very state-led development planning that has left India poor. Moreover, even now, by camouflaging the pain of economic failure, foreign assistance discourages New Delhi from adopting politically difficult reforms. It can more easily spurn foreign investment and trade.

International surveys consistently show that countries with freer economies grow faster, and that market-oriented reforms speed growth. If New Delhi hopes to take its rightful place among the world's leading states, it must abandon its dirigiste fantasies. Freeing markets, for HIs and other products, is sometimes painful, but suppressing them is always disastrous.



Doug Bandow is a senior fellow at the Cato Institute, and the co-editor of "Perpetuating Poverty: The World Bank, the IMF, and the Developing World."

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