INDIA: POLITICAL AND ECONOMIC OVERVIEW

GOVERNMENT

In October 1999, a 24-party coalition, the National Democratic Alliance (NDA), led by Prime Minister Atal Bihari Vajpayee of the Bharatiya Janata Party (BJP) was re-elected with a strong majority (301 seats of 543 in the lower house, the Lok Sabha). The NDA coalition government, having overcome several periods of political turmoil over the past two years, has proved more adept and resilient than preceding administrations. Among its successes, the NDA government has approved new economic and regulatory legislation. India's sustained economic growth, market potential and status as a regional power attracts international interest. In 2002, the BJP has faltered badly in state elections in Punjab, Uttar Pradesh and Manipur and in municipal elections in New Delhi, putting strains on the NDA.

CENTRE-STATERELATIONS

While there are violent separatist movements in Kashmir and parts of the northeast, overall India's internal unity is strong, reflecting the success of democratic institutions in meeting the challenges of ethnic and religious diversity. India has 28 states and 7 union territories. The union government holds the greatest concentration of power ( defence, foreign affairs, taxation, and monetary regulation). The states, however, have some unique powers (for example, intra- state trade and sales tax) and others are shared. The union government is beginning to devolve some of its powers to the states. It created three new states in late 2000 --Chhattisgarh, Uttaranchal and Jharkhand. De-regulation is enabling the private sector to function more freely in all states. Some states have attached a high priority to attracting foreign direct investment (Fill). Different state tax regimes, procedures and customs make doing business more complex.

DEFICIT

The combined union and state fiscal deficits declined from 9.4 % of GDP in 1999/00 to 9.1 % in 2000/01. Shortfalls in revenues and higher spending may cause the deficit to rise this fiscal year (IMP estimate 11 %+). The union government and state governments still spend inordinately on subsidies for food, fertilizers, water, fuel, power and loss-making public enterprises. The fiscal deficit raises the cost of business, reduces investment in infrastructure and drives up interest rates.

INFRASTRUCTURE

Weaknesses in infrastructure hinder more rapid economic growth. Despite an annual growth rate in the electrical power supply of 6%, power deficits remain widespread. Telecommunication facilities are improving, though reform is incomplete and systems still do not meet business or public needs. India's airports require upgrading to international standards. India's ports are congested and costs are high, but private ports relieve pressure. India has only a fraction of the road network needed to support a growing economy, and its existing road and railway systems have deteriorated. The government has announced substantial investments in road building.