India's Energy Development India's Elections: What Do They Mean For Economic reform?

Bob Tippee
Managing Editor-Economics and Exploration

India's parliamentary elections last month raised more questions than they answered within the country and left the international oil and gas industry with one of its own:

What effect will the outcome have on the economic reform program begun by outgoing Prime Minister P.V. Narashima Rao?

Liberalization of India's highly regulated economy, with its legacy of state ownership of key industries, is crucial to access by international companies to oil and gas opportunities. Those opportunities run the range from exploratory rights to downstream projects including refinery construction and electric power plants.

The liberalization program obviously will be affected by whatever government emerges from the political jostling necessitated by an indecisive election. India's three stage general election, in which an estimated 335 million people voted, gave no party a majority of the 545 seats of Lok Sabha, the lower and more powerful house of the bicameral parliament. The clearest signal from the election so far is that political power is moving away from national power centers toward regional parties and parties based on caste.

Among India watchers in oil companies there seems to be consensus about at least one effect that the post-election political confusion will have on economic reform: It will slow the process but probably not derail it.

Government collapses

The first attempt to form a government after the election failed, and the second wasn't given much hope.

On May 16, Indian President Shankar Dayal Sharma invited the leader of the Hindu nationalist Bharatiya Janata Party (BJP) to form a government and try to prove a majority in the Lok Sabha. The BJP and allied parties had won 195 of the 534 seats declared at the time, most of any political group in the elections.

Sharma's invitation made BJP leader Atal Bihari Vajpayee the prime minister for what proved to be the shortest term of that office in Indian history. Although Vajpayee is a respected moderate, opponents portrayed his Hindu nationalist government as a threat to India's secularist legacy and an invitation to repression of Muslims.

Those sentiments are partly rooted in BJP's role in fatally violent protests that followed destruction of a mosque at Ayodhya, Uttar Pradesh, in December 1992 (see article, p. 56). Opposition to BJP became a cause around which India's other parties could rally.

On May 28, Vajpayee resigned rather than allow a vote of confidence his party seemed destined to lose.

Sharma then asked H.D. Deve Gowda, a leader of the Janata Dal party and chief minister of the southern state of Karanataka, to form a government. Gowda was the prime ministerial candidate of a coalition known during the elections as the National Front-Labor Front (NF-LF) and afterward as the United Front (UF).

Sharma gave Gowda a June 12 deadline for proving majority support in the Lok Sabha with a vote of confidence.

By the time Gowda became prime minister, 535 Lok Sabha seats had been filled. Others awaited results from delayed elections in Jammu & Kashmir and parts of Andhra Pradesh and Karnataka.

The UF was believed to have support of 194 Lok Sabha deputies. The Congress (I) Party, which had controlled the government for most of India's history, won 139 seats in the election and pledged to support the UF without joining it in forming a government.

Emphasis on moderation

For international investors, a Hindu replacement for India's long-secular government could hardly have held much appeal, especially if it raised tensions between the country's 765 million Hindus and 100 million Muslims.

But outside investors had reason to be suspicious as well of the United Front, which had its origins in India's leftist parties and appeared likely to have difficulties of its own holding members together long enough to survive a confidence vote, let alone govern.

Failure of the UF to form a government might either hand Congress an opportunity to resume power in coalition with parties departing the UF or necessitate another election.

Amid all the uncertainty, however, was a strong emphasis by all parties on moderation.

The UF's selection of Gowda as its prime minister was a step in that direction. He has supported liberalization of his state's economy and is considered a coalition-builder, a crucial skill at this point in Indian political history.

But Gowda, who doesn't speak Hindi, might lack national appeal.

The UF took another step toward moderation when it indicated that former Commerce Minister P.A. Chidambaram would be its candidate for finance minister. As a former member of the Congress party, he would provide some comfort to business interests. But his selection might rankle Congress and thus weaken the shaky UF-Congress alliance since he was among Congress party defectors in Tamil Nadu who formed the Tamil Maanila Congress for the elections.

The UF's leftist leanings were fading even before Gowda became prime minister. Before it changed its name from the NF-LF, one of its key pre-election constituents, the Communist Party of India-Marxist, refused to join it in formation of a government but pledged support.

The post-election alliance with Congress, however tentative, was another move by the coalition toward the political center.

For its part, the BJP, which is far from out of the picture, emphasized moderation with its selection of Vajpayee as prime minister.

A member of the parliament for almost 40 years, Vajpayee, who comes from Madhya Pradesh, has a reputation for integrity and moderation. He has often spoken against his party's extreme positions and was quick to condemn its participation in the Ayodhya mosque confrontation.

Among other BJP positions with possible effects on India's attractiveness to international capital are a hard stance against Pakistan, an historic and mostly Muslim antagonist, and its insistence that India openly declare itself a nuclear power.

The flashpoint of Indo-Pakistani relations is the northern Indian state of Jammu & Kashmir, which includes territory claimed by Pakistan. The BJP has advocated repeal of the autonomy that India grants the state, which has a majority Muslim population, and for reclamation of Kashmir territory that Pakistan has won from it in war.

Vajpayee has been far more moderate in deed toward Pakistan than his party has acted in rhetoric. As India's foreign minister in the Janata Party government of 1977-79, he worked for friendly relations with Pakistan.

On the nuclear issue Vajpayee has been more aggressive, insisting that India has the right to openly develop its nuclear defenses because of threats from Pakistan and China. For international investors, the fear is that such development, especially if it led to test detonations of nuclear weapons, would make India a target of international economic sanctions.

In another area of concern, BJP's attitude toward foreign capital, Vajpayee moved quickly during his brief term as prime minister to demonstrate moderation. He named as finance minister a reputed economic moderate, Jaswant Singh, who promptly made clear that BJP had pushed for economic reform before the Congress party began to do so.

BJP has said it welcomes liberalization of most sectors of the Indian economy, the main exception being production of consumer goods, which it would reserve for Indian capital. It is unclear whether consumer goods in BJP's view includes petroleum products.

The reforms

India's economic reforms began with a stand-by arrangement with the International Monetary Fund in October 1991 aimed at reducing the fiscal deficit and reducing inflation. In 1992, the government liberalized trade policy, cutting customs duties, especially for capital goods.

The official position is to welcome foreign investment and to offer quick approval of ventures involving as much as 51% foreign equity in 34 industries. Higher levels of foreign investment are permitted with government approval. The only industries explicitly excluded from foreign investment are defense, railways, and atomic energy.

Progress toward reform slowed last year as the Congress party's political problems became evident in state elections and as this year's general elections approached.

In the oil and gas industry, liberalization has meant privatization and the offer of upstream and downstream projects to non-Indian private companies. But progress on both fronts has been slow.

Upstream, the aim is to allow foreign firms a role previously dominated by state-owned Oil & Natural Gas Corp. Ltd. (ONGC, formerly the Oil & Natural Gas Commission) and the smaller Oil India Ltd. The government offers a year-round bidding scheme for exploration acreage and provides for the formation of joint ventures between foreign companies and ONGC or OIL.

Downstream, the government has moved to encourage private investment in the formerly state-dominated refining industry, capacity of which is insufficient against anticipated oil consumption. It also has allowed private companies to market selected products alongside the state-owned distributors in place.

Measured response

The international industry's response to India's upstream offerings has so far been measured. Oil companies have quietly expressed complaints about the quality of acreage made available to them and concerns about the political questions facing the country (OGJ, Feb. 12, p. 19).

Among projects involving non-Indian companies is a joint venture between ONGC and Hyundai Heavy Industries of South Korea for development of Bombay High offshore fields.

Also, Command Petroleum Ltd. of Australia, Videocon International of India, and Marubeni of Japan hold a production sharing contract for development of Ravva oil and gas field in the Bay of Bengal. And Enron Corp. and Reliance Petroleum Ltd. won rights to develop Tapti, Panna, and Mukti oil fields off India's west coast.

Recently, Vaalco Energy of the U.S. and Hindustan Oil Exploration Co. and Tata Petrodyne of India negotiated a production sharing contract for exploration of the Cauvery basin on the east coast.

India's downstream has generated interest because of the potential for growth in the oil market. Plans for a number of projects have been announced, not all of which will reach the construction stage (see article, p. 43).

Economic liberalization also has opened the door to several large electric power projects, many of them based on natural gas.

Construction awaits politics on the controversial project at Dabhol, Maharashtra, by Enron Power Development Corp., General Electric Corp. and the Maharashtra state electricity board. The 2,015 megawatt project, first agreement for which was overturned when the state government changed, is still under review. To fuel the plant, Enron has entered a joint venture deal to import 2 million metric tons/year of liquefied natural gas from Qatar.

In one of its few official acts, the short-lived BJP government approved construction of the Dabhol plant, raising protests from other parties. The BJP said it had to act to meet a June 6 deadline. An alliance of the BJP and a local Hindu national party, the Shiv Sena, annulled the original Dabhol contract when it won control of the Maharashtra government last year.

Other large gas-fired power projects are planned at Agartala, Amalapuram, Anguri, and Pipara.

The outlook

So far, international concern regarding India's economic reforms after the elections relates more to speed of the process than the chance that it might be reversed.

No significant party is campaigning against the need for reform, although parties differ on how it should occur. Post-election coalition-building has, if anything, pushed all parties toward the middle of the political spectrum, where support for reform, at least as a concept, tends to be consistent.

A weak parliament nevertheless makes it difficult for any government to make bold changes. Until a stronger government emerges, reform steps are likely to be small and subject to setbacks.

Under the previous government, petroleum industry change was moving slowly. The government never produced a specific policy on liberalization for the refining and marketing business. And the BJP's new influence will worry downstream investors until the party excludes oil products from the consumer-goods production category for which it resists foreign capital.

A more important legacy of the elections for international oil and gas companies is decentralization of the government. The apparent shift of power toward India's states will have lasting effects if the trend lasts.

That could make investing and working in India more complicated than it has been by creating a multitude of negotiating and regulatory jurisdictions.

But there may be an advantage, points out an oil company analyst who does not want to be identified. Decentralization takes decisions out of the realm of the federal government's notoriously sluggish bureaucracy. That, by itself, amounts to useful economic reform.

Political parties align around three centers of influence

THREE CENTERS OF INFLUENCE are shaping politics in India.

With no single party or group of parties able to win a majority of votes in the parliamentary elections that ended last month, governance depends on coalition-building and compromise along these three lines of force.

One center of influence is the big loser in the elections. The Congress (I) Party had controlled the government for most of the past 49 years. As the legacy of Mahatma Gandhi, Jawaharlal Nehru, and Indira Ghandi, the Congress Party-for which the parenthetical "I" stands for "Indira"-established India's secularist traditions.

Although the election cost it majority control of the Lok Sabha, the lower and more important house of parliament, and therefore control of the government, Congress remains an important factor in Indian politics. With 139 seats, it was runner-up in the election.

The ascendant party is the Hindu nationalist Bharatiya Janata Party (BJP). In mid-May, BJP leader and Prime Minister-designate Atal Behari Vajpayee was trying to form a coalition able to govern. Having won more Lok Sabha seats than any other party, 195 including seats of its allies, Vajpayee's BJP received an invitation from India's president to form a government able to survive a vote of confidence by May 31.

With origins in an urban Hindu group called Jana Sangh, BJP's inclinations are religious and isolationist. It has pledged, for example, to harden India's foreign policy stance against Pakistan, soften its welcome to foreign capital, and annul legal protections of 100 million Indian Muslims. Under the influence of moderate Vajpayee, however, BJP has relaxed its most extreme positions.

Although it failed to sustain a government, the BJP proved with its vote count that it is an important political force.

The third key influence is a group of regional and caste-oriented parties that coalesced around the Janata Dal (JD) party before the election as the National Front-Left Front (NF-LF) and afterward called itself the United Front (UF). The coalition's political strength comes mainly from its opposition to the BJP's Hindu nationalism. The UF picked as its prime ministerial candidate H.D. Deve Gowda, a former JD member of parliament and now chief minister of Karnataka.

The BJP and JD both derive from the Janata Party (JP), a five-party coalition that beat Indira Gandhi in a 1977 election and ruled India until 1979. A third surviving JP offshoot retains the original coalition's name but lacks the influence of the other two.

NF-LF's leftist support proved creaky after the election. The Communist Party of India-Marxist (CPI-M), one of the country's two main communist groups, refused to join the group in its attempts to form a government but pledged to support it in the Lok Sabha. The CPI-M and India's other communist party, the Communist Party of India (CPI), split in the 1960s.

The need for a coalition government demonstrates not just the growing balance between the three main centers of influence but also recent growth in importance of regional and caste-oriented parties. As a group, these narrowly focused pockets of influence gained ground in the election in what may prove to be the election's most important effect: decentralization of Indian power.

Measuring the shift of support toward non-national parties is difficult because categorizing specific parties can be misleading. Some technically national parties receive most or all of their support from specific regions. All of the CPI-M's support, for example, comes from West Bengal. The JD's power is mostly concentrated in Bihar and Karnataka. And most of the BJP's support comes from six northern and western states. Furthermore, some regional parties form interstate alliances with national clout, which further complicates measurement.

However the votes are classifed, a power shift is clear. By the reckoning of the Financial Times of London, regional and caste-oriented groups in total received an 11% swing of support in the recent elections and accounted for nearly 40% of the vote.

The small parties thus will enjoy growing influence as political influence moves away from New Delhi toward capitals of India's 25 states and seven union territories. Keeping track of them requires the ability to decode a mix of abbreviations by which many of the groups are commonly known.

What follows is a partial, alphabetized list of the nonnational parties and coalitions of India, beginning with abbreviations when they are the usual first reference:

Aidmk-All India Anna Dravid Munetra Kazhgam, a Tamil Nadu party with which Congress Party leader and former Prime Minister P.V. Narashima Rao formed a controversial and costly alliance.
AGP-Assam Ganatantra Parishad, an Assam ally of UF
AD-Akali Dal, a BJP ally in Punjab.
BSP-Bahujan Samaj Party-a lower-cast party with roots in Uttar Pradesh that won 10 seats in the elections and will be an important target for coalition builders.
DMK-Dravida Munnetra Kazhagtam, a lower-caste party in Tamil Nadu with which Congress Party defectors opposing the alliance with Aidmk formed their own alliance.
HVP-Haryana Vikas Party, a Hindu party from Haryana strongly allied with BJP.
Samata Party, a regional party with links to former Prime Minister Chandra Shekhar and allied for the elections with the BJP.
Samajwadi Party, a lower caste party, led by former Uttar Pradesh Chief Minister Mulayam Singh Yadav, important to coalition builders; a member of the UF coalition.
Shiv Sena-A strongly Hindu-nationalist party in Maharashtra, allied with BJP.
TDP-Telugu Desam Party, an Andhra Pradesh party that entered the elections split into two factions, each leaning toward different parts of the NF-LF coalition. Because of the divided alliances, post-election support by the surviving faction, TDP (Naidu), for the coalition was weak.
TMC-Tamil Maanila Congress, the party formed in Tamil Nadu before the elections by Congress party leaders, including the state chief minister, angered by Congress's decision to form an alliance with the AIDMK instead of DMK. The TMC-DMK alliance won 37 of 39 Tamil Nadu's seats in the Lok Sabha.

Decentralization has roots in India's recent history

DECENTRALIZATION OF POLITICAL power in India began long before the indecisive parliamentary elections of 1996.

Had it not been for sympathy voting after the assassination of former Prime Minister Rajiv Gandhi on May 27, 1991, the Congress (I) Party might have lost its control of the Lok Sabha, the lower and more powerful house of India's parliament, 5 years earlier than it did. In any case, Congress's longstanding control of the Indian government has had its lapses.

India's current political turmoil results to a great degree from the social and economic forces that have buffeted Congress and the secular, centralized form of government it represents throughout the country's history as a sovereign federal republic.

Beginning when Jawaharlal Nehru became India's first prime minister in August 1947, the party that would become Congress ruled the country until 1977, when a beleaguered Prime Minister Indira Gandhi, Nehru's granddaughter, called elections in a play for support and lost.

The victor was the Janata Party, headed by Moraji Desai, who ruled until his government collapsed in 1979. Indira Gandhi returned to power in 1980, replacing an interim government headed by Charan Singh, and was assassinated on Oct. 31, 1984.

She was replaced by her son Rajiv, whose government fell amid charges of corruption in 1989. A coalition led by the Janata Dal party formed a replacement government and made former deputy to Gandhi, V. P. Singh, prime minister.