CIAO DATE: 2/00

Change in Pakistan: Continuity in India

The South Asia Monitor
Number 15
November 1, 1999

The Center for Strategic and International Studies

 

Just as India’s prime minister, Atal Bihari Vajpayee, was being sworn into office in New Delhi after a solid re-election victory, Pakistan’s Chief of Army Staff, General Pervez Musharraf, took power in Islamabad, ousting an increasingly unpopular and dysfunctional government. The change in Pakistan complicates India-Pakistan relations. Both governments will also be focusing on economic issues. In India, the accent will be on continuity, but the new government should be better placed to make policy in a medium-to long-term time horizon because it enjoys an enhanced majority. In Pakistan, the accent will be on crisis management and addressing problems that have gone untended for years. Both countries will be cultivating their relations with Washington.

 

India: A stronger BJP-led alliance:

The ruling Bharatiya Janata Party (BJP)-led coalition, 24 parties strong, was returned to office with a strengthened majority. The coalition relies heavily on regional parties from outside the “Hindi belt” in northern India. The result is likely to be a more stable coalition. Only one coalition partner, the Telegu Desam Party (TDP), has enough seats to topple the government, but the party is unlikely to engage in political brinkmanship. Fresh from its election victory and conscious of “election fatigue” in the Indian public, the new government will be examining legislation making it harder to bring down a government before the parliamentary term has run out.

The new cabinet stands for continuity. The key portfolios of External Affairs, Home Affairs (internal security), Defense, and Finance are unchanged. At 70 members, it is larger than the outgoing parliament, primarily through the addition of a large number of ministers of state.

 

Vajpayee’s agenda: moving the economy:

The government’s first policy statement, the presidential address to a joint session of Parliament, devoted much of its attention to economic issues and was clearly intended to create a sense of momentum. Infrastructure development was specifically mentioned, with the accent on mobilizing private capital.

The new government has come to power under relatively favorable economic conditions. Industrial growth increased from 3.2 percent in the last quarter of 1998 to 5.4 percent in the second quarter of 1999; agricultural growth is generating higher consumer demand; wholesale price inflation is at a low of two percent; and foreign exchange reserves are comfortable at U.S.$33 billion. GDP growth is forecast at 6 percent and above during 1999-2000, provided the widening budget deficit, which stands at over 9 percent of GDP, is contained.

The burgeoning budget deficit represents the biggest threat to macroeconomic stability and growth. Government expenditures are higher than last year’s—mainly due to military expenditures in Kargil—while tax revenues are lower. The structure of India’s budgetary expenditures is heavily skewed toward current expenditures (50 percent of total revenues are devoted to debt servicing), leaving limited resources for capital expenditures on infrastructure and social services. Subsidies amount to over 14 percent of GDP; reductions are politically difficult, especially for some of the BJP’s regional allies.

Borrowing to finance the current deficit has already resulted in interest rates of 10-12 percent. Continued borrowing at this level could put the government’s promise of 7 to 8 percent GDP growth out of reach. Deficit reduction measures will focus on tax reform and disinvestment in state enterprises, rather than on drastic expenditure cuts. Tax proposals will probably feature a mix of tax rises, tax-base widening measures, and simplification of tariff bands.

The most interesting sector-specific measures on the government’s early policy agenda include:

• Power sector: unbundling the generation, transmission, and distribution activities of the State Electricity Boards (SEBs), allowing private sector entry in transmission and distribution, reassessing the tariff rates for power, and establishing regulatory bodies at the state level. A hike in tariff rates for power would be extremely controversial and would test the unity of the coalition, as it strikes at the agricultural support base of several of the ruling coalition parties.

• Fuel pricing: dismantling the “administrative price mechanism” (APM), under which the prices for gas and petroleum products are regulated. A first step in this direction has been the politically unpopular decision, taken soon after the end of last month’s voting, to raise the price of diesel by 35 percent.

• Insurance bill: the new cabinet has approved a draft bill that would end the monopoly of the two state insurers, General Insurance Company and Life Insurance Company, by allowing the entry of private insurance companies. It also would establish an insurance regulatory authority with statutory powers. Foreign investors would be allowed 26 percent foreign direct equity in future private insurance firms. The insurance bill has failed in the past at the parliamentary stage, but the government hopes that its enhanced majority will permit it to pass.

 

Pakistan: “Good riddance,” but big problems:

Over the past decade, Pakistan has witnessed increasingly dysfunctional government, a crisis in government finances and the balance of payments, growing sectarian strife, the decay of important public institutions, pervasive corruption, and alienation in the smaller provinces. The proximate cause of this month’s coup lay elsewhere, namely, in the army’s resentment at having been made to pull out of the Kargil area of Kashmir last summer and in Prime Minister Nawaz Sharif’s sudden decision to fire the army chief and replace him with a more political general. But the relief that greeted the October 12 military intervention is a measure of the failure of four successive democratically elected governments over 11 years.

General Pervez Musharraf, the “Chief Executive,” was known in the army as a “soldier’s soldier,” not a political general. After his hastily decided coup, he has moved slowly to put in place his team. The first group of high- level appointments was announced nearly two weeks after the coup. It includes respected professionals and senior personalities who were prominent in General Zia’s government.

The new foreign minister, Abdul Sattar, is a highly skilled former diplomat who served twice as ambassador or high commissioner in India, a tough defender of Pakistan’s interests, but also a sober and realistic observer of his own country’s weaknesses. He has been scathingly critical of the Kargil operation. The new finance minister, Shaukat Aziz, comes from a senior position in Citibank’s New York headquarters, and will bring considerable sophistication to managing Pakistan’s finances. Appointees who had held senior positions in General Zia’s government include Zia’s principal legal adviser, Sharifuddin Pirzada. The group also includes two other former senior government officials, including the governor of the central bank. But the country and the world are waiting with some impatience for the rest of the team to take shape.

 

Musharraf’s agenda: domestic issues:

Moving promptly on corruption, the financial authorities have released several lists of major defaulters on government loans, and General Musharraf has publicly exhorted them to pay up in four weeks or face the consequences. This effort will have broad popular support, but people will be watching to see that the government’s prosecutions are carried out even-handedly.

Next on his crowded agenda will be government finances. Pakistan was already in negotiations with the International Monetary Fund (IMF) over the next tranche of its financial stabilization package. Compliance with earlier conditions had been weak. Under present circumstances the country will have no choice but to deal seriously with its distorted tax structure and ineffective and corrupt revenue collection.

The rest of the reform agenda—rebuilding institutions, improving inter-provincial relations, reducing sectarian violence, and reestablishing a more effective justice system—will take longer. Important indicators will be how the justice system operates with the constitution suspended, whether the new government settles outstanding issues with the independent power producers, how the Islamic right reacts over the longer term, and how the government reaches out to the smaller provinces. This last point is especially difficult for a non-elected government to deal with.

 

Foreign Policy:

Indo-Pakistani relations: Even without the change of government in Pakistan, India and Pakistan were expected to have difficulty resuming a serious dialogue. India views General Musharraf, the author of last summer’s Kargil operation, with suspicion. Prime Minister Vajpayee will be looking for evidence that infiltration into Indian-held Kashmir is significantly reduced before engaging in meaningful talks.

General Musharraf has pledged nuclear restraint and has withdrawn some Pakistani troops from the international border. But the more volatile Line of Control in Kashmir is not included in this withdrawal, and recent days have witnessed skirmishes between Indian and Pakistani troops there. General Musharraf may well want to cool the Kashmir dispute while he tackles his domestic crisis. Cracking down on militants offers a real opportunity to improve relations with India, but would be a hard decision for him.

Relations with the United States: Both countries have given prominence to their ties with Washington. In India, the president’s policy speech took the highly unusual step of listing the United States first among the countries with which it sought strong relations. Hope for expanded economic ties and satisfaction with Washington’s recent position on India-Pakistan issues are both factors here.

Pakistan hopes to reduce short-term American pressure to restore an elected government. While U.S. law rules out bilateral aid, Washington’s acquiescence in IMF and World Bank programs will be essential. In light of last summer’s experience, Pakistan probably sees little hope of obtaining U.S. mediation on Kashmir. To achieve the understanding it seeks from the United States, Pakistan will need to move vigorously on its domestic agenda, cool down its confrontation with India, and deal with U.S. concerns about terrorism in Afghanistan. The new government is unlikely to change its basic orientation toward the Afghan Taliban, but it may bring sharper pressure on them to expel Osama bin Laden.