Economic Liberalization in India: The New Electronics Policy

Author(s): Eddie J. Girdner

Source: Asian Survey , Nov., 1987, Vol. 27, No. 11 (Nov., 1987), pp. 1188-1204
Published by: University of California Press

Stable URL: https://www.jstor.org/stable/2644722

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 ECONOMIC LIBERALIZATION IN INDIA
The New Electronics Policy

Eddie J. Girdner

India's renewed efforts to liberalize domestic indus-

trial policy and import licensing, and simultaneously to acquire a base of
high technology from the West, marked a significant shift in economic
policy.' The government is especially interested in modernization in the
areas of electronics and communications, and a study of these key sectors
gives us some means of coming to grips with the debate about economic
liberalization and the controversy about import substitution vs. export
promoting strategies. Will this shift in policy actually work? Will it push
India forward into the circle of booming new industrial countries like
South Korea, Taiwan, and Hong Kong, and to the frontiers of high tech-
nology in a generation or two? And, even if it does, will it help the hun-
dreds of millions of Indians who still live in dire poverty?
The new Indian government shows no qualms on these scores. But
while Prime Minister Rajiv Gandhi sees "high technology as a tool for the
removal of poverty, by means of improved production and better qual-
ity,"2 others suggest that profitability, rather than social obligation, is now
the government's top priority. In 1984, when Indira Gandhi was still
prime minister, the Arjun Sengupta Committee was set up to review the
role of public sector enterprises in the context of the economic structure of
overall planning, and former Finance Minister V. P. Singh stated in 1985

Eddie J. Girdner is Visiting Assistant Professor in the Department

of Political Science, University of Alabama. An earlier version of this article was presented at
the 1986 annual meeting of the Association for Asian Studies. The author wishes to thank
Professor Michael Gordon for helpful comments and suggestions.

? 1987 by The Regents of the University of California

1. Attempts to liberalize the overregulated Indian economy were begun in 1973. The
budget introduced by Rajiv Gandhi in April 1985 reduced personal and corporate tax rates,
cut duties on capital goods imports, and abolished the estate duty. See Robert L. Hardgrave,
Jr., and Stanley A. Kochanek, India: Government and Politics in a Developing Nation, fourth
ed. (New York: Harcourt Brace Jovanovich, 1986), pp. 317-333.
2. The Statesman Weekly, November 23, 1985.

1188

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 EDDIE J. GIRDNER 1 189

that losses in public sector undertakings could no longer be justified on

social or economic grounds.3
While most analysts agreee that many Third World democracies, in-
cluding India, could benefit from a rational policy shift toward fewer con-
trols and a more open and competitive economy, a South Korean or
Brazilian "miracle" is not likely in India. A fundamental constraint on
such a development is the political system. Within a nationalist-reformist
as opposed to a bureaucratic-authoritarian model of development, and
with labor discipline difficult to impose, policy shifts can at best be incre-
mental. The nature of the society in India makes a radical shift from an
import substituting strategy to an export producing strategy difficult to
achieve because of the attachment of elites to the established pattern of
development, seen as a "socialist pattern of development."4 Indeed, while
the recent policy initiatives appear to shift the balance toward greater reli-
ance upon the private sector, Prime Minister Rajiv Gandhi has promised
that the broad guidelines laid down in the 1956 Industrial Policy Resolu-
tion will not be altered.5 Whether the government can successfully steer a
steady course toward economic liberalization, while expanding equality
and justice, preventing inflation, meeting the increased balance of pay-
ments gap, increasing productivity and exports, and preventing a "populist
counterattack" such as that which followed attempts at economic liberali-
zation in the 1960s,6 are key questions that will determine the success of
the current reforms.
This essay will argue that while a degree of economic liberalization is
possible, political constraints will prevent an economic "miracle" similar
to that in East Asia. A moderate pace of development is likely to continue
with protection for small scale and public sector firms. Liberalization in
selected areas, however, such as the high-tech electronics and telecommu-
nications sectors, will provide increased opportunities for local entrepre-
neurs and for multinational corporations (MNCs) in collaboration with

3. The finance minister emphasized the need to earn foreign exchange. The new criteria
for success in the public sector will be contribution to plan outlay, foreign exchange earnings,
and efforts toward genuine indigenization. Times of India (hereafter TOI), November 30,
1985, p. 7.
4. Jagdish N. Bhagwati, "Rethinking Trade Strategy," in John P. Lewis and Valeriana
Kallab, eds., Development Strategies Reconsidered (New Brunswick, N.J.: Transaction
Books, 1986), p. 92.
5. The Industrial Policy Resolution of 1956 provided for the continued role of the public
sector in all industries of basic and strategic importance. The telecommunications industry
was reserved for exclusive development by the state. See Suraj Mal Agarwal, "Electronics in
India: Past Strategies and Future Possibilities," World Development, 13:3, 1985, p. 280.
6. Hardgrave and Kochanek, India, pp. 315-317.

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 1190 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

public and private firms. These sectors should then be boosted both by
increased opportunities for exports and by a sizeable internal market due
to the obsolescence of much equipment presently in use.

The Electronics Industry as a Test of

Economic Liberalization
The recent controversy over excessive government control and the need for
economic liberalization is nowhere more sharply demonstrated than in the
high-tech electronics and telecommunications sectors. While policy mak-
ers in India have successfully gained a large degree of autonomy from the
core industrial states and implemented an electronics policy consistent
with the national consensus of self reliance and public sector participation
in an essentially capitalist economy,7 excessive regulation has inhibited
modernization and prevented Indian entrepreneurs in the private sector
from availing themselves of new opportunities in the international high-
tech electronics industry.8
Proponents of import liberalization and greater reliance upon the pri-
vate sector argue that technology transfer is necessary if India is to mod-
ernize and create new wealth. They point out that the policy of import
substitution and excessive protectionism, along with a cumbersome bu-
reaucracy, has failed to result in sufficient progress in high-tech electronics
and telecommunications industries. Prime Minister Rajiv Gandhi has
stated that poverty can be "removed only through adoption of better tech-
nology and a giant leap to catch up with the rest of the world." Self reli-
ance (swadeshi), he stresses, does not mean obsolete technology.9 It is
pointed out that while indigenous manufacture of electronics and telecom-
munications equipment is necessary given foreign exchange constraints,
Indian research and development has been inadequate, and in the interest

7. Since 1956, development policy has been a compromise among three distinct visions of
India's economic future: the Gandhian vision of decentralized small-scale production, the
socialist vision, and the liberal-capitalist vision. See Hardgrave and Kochanek, India, pp.
309-3 13.
8. India's experience with IBM illustrates this dilemma. In the 1970s, politics played a key
role in India's hard line position on equity participation with IBM. Policy makers who feared
they would be seen to favor the interests of MNCs refused to compromise with IBM, result-
ing in the company's termination of operations in India. While this decision may have
delayed modernization of the computer industry, it was highly successful politically and in-
sured that India would control its computer policy. See Joseph M. Grieco, Between Depen-
dency and A autonomy: India 's Experience with the International Computer Industry (Berkeley:
University of California Press, 1984).
9. TOI, Nov. 10, 1985, p. 1; Dec. 30, 1985, p. 1.

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 EDDIE J. GIRDNER 1 191

of efficiency greater reliance on market forces is necessary in both private

and public sectors.
Critics of the New Electronics Policy argue that even if the import of
foreign technology is necessary, it is not sufficient to insure modernization
and propel India to the forefront of modern technology. O They point out
that the structure of the international high-tech electronics industry is not
suited to India's needs and capabilities. The manufacture of computer
software for export, for example, is based upon the needs and requirements
of the importing countries and supposedly contributes nothing to the mod-
ernization of electronics hardware in India. In the manufacture of com-
puters and silicon chips, they argue that to compete, countries must
develop economies of scale and that this will not be possible in India. Fur-
ther, the capital intensive nature of the electronics industry will tend to
exacerbate the problems of unemployment and inequality and conse-
quently do little or nothing to relieve poverty. Moreover, they say, it will
create greater unemployment in lower technology areas such as textiles, in
which over sixty million Indians work. Some argue that, given foreign
exchange constraints, import liberalization has already gone about as far
as it can go. Others believe that India lacks an "industrial culture" and
consequently will be unable to adapt the imported technology to its needs
and develop it through an indigenous program of research and develop-
ment (R&D). It is feared that dependence upon high technology will
widen the gap between the urban middle class and the great majority who
still live in poverty.
In the view of Rajni Kothari, the perspective of the new generation of
rulers represents a "reversal of long standing policies towards the lower
classes and ethnic minorities" and "an impulse that must of necessity di-
vide the country into two Indias . . . one very modern, having access to
resources, information and technologies, and the other very much left be-
hind, in fact bearing the brunt of the whole structure of exploitation and
oppression that is inherent in such a process of growth." He has character-
ized the views of the policy makers as a "psychic flight into the 21st cen-
tury" marked by four major characteristics. It is "unambiguously
futuristic"; it is "apolitical, based on the idea that politics keeps us back-
ward"; it is "technocratic, viewing technology as a substitute for politics";
it is "managerial, in which technology expertise takes the place of political
competition between diverse social forces."1 1
These sharply divergent views suggest that the debate is unlikely to be
quickly resolved. India has become an increasingly politicized society with

10. Economic and Political Weekly (hereafter EPW), Jan. 5, 1985, pp. 10-11.
1 1. TOI, April 27, 1986, pp. 1, 5.

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 1192 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

escalating and highly conflictual demands upon the government from new
business groups, small scale industries, rich farmers, professionals, and the
organized working masses, as well as caste, religious, and ethnic groups.
The elite consensus on development policy forged in the 1950s is quickly
eroding.

Structure of the Electronics Industry

In India there is a large, unfulfilled demand for electronics products for
transportation, communication, entertainment, defense, and for personal
computer items. The Telecom Department has a waiting list of over
740,000 for telephones. Telecom equipment is terribly inadequate, woe-
fully out of date, and poorly maintained. The gap between supply and
demand is widening, indicating an infrastructure that is extremely inade-
quate for accelerated development.12 Between 1985 and 1989 demand is
expected to grow six-fold. But recent growth in the electronic sector has
been slow and exports sluggish. A significant problem has been that indig-
enous R&D has not insured high quality products which can compete in
the international markets. Generally, the Indian electronics industry is
about three generations (15 years) behind the current frontiers of research
and production.
Until recently, duty structures applicable to electronics items and bu-
reaucratic regulations rendered modernization in the electronics sector ex-
tremely difficult. As one observer noted, "With a concern for state
capitalism and bureaucratic control bordering on the neurotic, the Depart-
ment of Electronics built up a history of delays and confusion that must
have had few parallels, even in this country." 13 An application for impor-
tation of a computer, for example, took over two years for approval or
rejection.
By the mid-1970s there were just two principal manufacturers of com-
puters in India, the state-owned Electronics Corporation of India (ECIL)
and the International Computers India Manufacture (ICIM) with both
public and private funding. Prices were astronomical and there was no
competition. The import duty structure made the actual manufacture of
computers almost uneconomical, as duties on components and subsystems
ranged up to 200% and more, and excise taxes on sales of finished prod-
ucts added another 30%. So-called manufacture was often merely the re-
furbishment of used and outdated equipment.14

12. Agarwal, "Electronics in India," p. 289; Indian and Foreign Review, March 15, 1985,
pp. 4-5,26.
13. EPW, Dec. 1, 1984, p. 2018.
14. Ibid.

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 EDDIE J. GIRDNER 1193

Since 1947, growth in the electronics industry has been based on govern-
ment initiative and support. This role has included direct manufacture,
establishment of policies to promote private sector production, protection
from imports, reservation of the manufacture of certain items to small
scale firms, export concessions, the establishment of national institutes for
training, and the operation of research and development labs. Major gov-
ernment undertakings include Indian Telephone Industries, Bharat Elec-
tronics, Ltd., Hindustan Teleprinters, and Hindustan Cables. In 1963 the
government established an Electronics Committee (the Bhabbha Commit-
tee) in the Department of Atomic Energy, specifying its goal as self-suffi-
ciency in electronics. In 1970 a separate Department of Electronics was
established, and in 1971 another commission was set up to establish poli-
cies and guidelines. Further, electronics development corporations have
been set up in most states and territories of India. In 1983 special tariff
and tax concessions to electronics firms were put into effect, and in March
1984 the Industrial Policy Resolution of 1956 was amended to allow the
manufacture of some telecommunications equipment by the private sector
or jointly with the government.15

The New Electronics Policy

The New Electronics Policy (NEP) was initiated by the Department of
Electronics in January 1984 under Prime Minister Indira Gandhi. Its key
elements include strategies to encourage the transfer of technology from
the West in an effort to modernize the whole range of electronics and tele-
communications industries. The government is particularly interested in
liberalization of the computer industry to reduce prices, encourage the use
of computers, and increase exports of computer software and peripherals.
Another goal is to import increasing numbers of main frame computers as
well as supercomputers from the U.S. for a wide range of uses, including
scientific research and weather forecasting. A program has been launched
to establish "science cities" in several states to promote electronics re-
search and development as well as investment by both public and private
firms. Indian scientists and engineers living abroad are being encouraged
to return to India through an attractive package of benefits and privileges.
Finally, the government anticipates the increased use of Export Processing
Zones (EPZs) to promote electronics exports and technology transfer.
In 1982 the possibilities of technology transfer from the West were ex-
plored. President Reagan and Prime Minister Gandhi agreed to launch a

15. "Electronics Policy and Indian Parliament," Indian Journal of Public Administration
31:2, 1985, pp. 241-254.

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 1194 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

science and technology initiative and to establish a panel of scientists from

both countries to determine priorities. This initiative was extended by
Prime Minister Rajiv Gandhi in 1985. Indo-U.S. cooperation in joint
space ventures began in 1963 with the establishment of the Thumba Equa-
torial Rocket Launching Station. Additional space projects are planned,
including the launching of the Insat satellite to be used for domestic tele-
communications, meteorology, and nationwide direct TV broadcasting to
rural communities.
Prime Minister Rajiv Gandhi and his "computer boys" have abolished
limits on how much a computer firm can produce, lowered import duties
on a variety of computers and components, and lifted many of the controls
on the computer industry. The goal for computer software exports is Rs.5
billion per year. It is expected that the new policy will bring down prices
and expand production of computers from 4,000 to 10,000 per year in the
next year. Nevertheless, prices are expected to drop only 25% with import
duties remaining at 180-220%. Imports will still cost about three times
the international price, but the government hopes to get the price down to
about twice this amount. The new policy introduces some international
competition, puts a floor on production (rather than a ceiling), and shifts
from physical control (capacity restraints or import bans) to fiscal control,
using excise and customs duties to regulate the market. The government's
attempts to import the latest technology from the United States and Japan
signifies a recognition that the transfer of modern technology from abroad
is necessary if India is to modernize its electronics and telecommunications
industries.
These policies have met with approval from large private industries such
as the Tata Group. Owners of small computer firms in the private sector,
however, view the new policies differently, arguing that many firms will be
ruined if computers from abroad are placed on open general license. This
claim, however, is undoubtedly exaggerated. It has been reported that
with no competition some firms were making a 30% profit. This cost the
customer Rs. 100,000 more for a computer while saving only $220 in for-
eign exchange. In any case, a great deal of protection for small firms will
still be provided under the new policies.16
In terms of new industrial ventures, the new policies appear to be getting
quick results. In Bangalore alone, the Department of Electronics has is-
sued more than 125 letters of intent to mostly private companies to manu-
facture electronics goods ranging from personal computers to aircraft
control systems. By 1990, Rs.8 billion is expected to flow into the Ban-

16. India Today (hereafter IT), Dec. 13, 1984, pp. 132-133.

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 EDDIE J. GIRDNER 1195

galore area. For example, Hewlett Packard in collaboration with Blue

Star (India) will manufacture personal and minicomputers; Sinclair of
Britain will collaborate with Madura Coats and Macmillans to produce
micro- and minicomputers; Texas Instruments is setting up a 100% ex-
port-oriented software unit for computer-aided design and manufacture;
Asea, a Swedish company, has set up a Rs.50 million unit to produce elec-
tronic weighing machines and microprocessors.'7 In the software indus-
try, Burroughs has been producing software for export with Tata since
1978. In general, there is a 40% limit on foreign equity in joint ventures.
The Indian government is also making efforts to transfer technology
through the Indo-U.S. Joint Commission, an official body established in
1974 for the purpose of promoting bilateral trade. An agreement is near
between the Indian government and Control Data Corporation on the
purchase of between $250 million and $500 million worth of computer
components. India hopes to purchase components and subassemblies for
600 main frame computers to be used in research, service, industry, and
possibly defense.18
The Indian government has also finalized an agreement with the
U.S. government on the purchase of a supercomputer-the $12 million
CRAY-XMP, expected to be installed in New Delhi in late 1987-to be
used in weather forecasting, agriculture, health, molecular biology, and
solid state physics. It is significant that the United States has allowed the
sale of supercomputers to India under unexpectedly liberal conditions, pre-
viously reserved for its close allies. According to a report on Indo-U.S.
projects in science and technology released by U.S. Ambassador John
Gunther Dean in December 1985, 259 cooperative programs are being
supported by current U.S. funding.19
India is also seeking to acquire technology and expertise from Japan.
An agreement signed with Japan in November 1985 provides for techno-
logical assistance in high-tech electronics over a five-year period. It is
hoped that such agreements can improve management and quality control.
India has also discussed the possibility of setting up joint ventures in elec-
tronics with Pakistan.20

17. IT, Nov. 30, 1985, p. 60. Bangalore has become the nucleus for electronics in India
with the greatest concentration of professionally skilled labor in electronics, more than 1,000
ancillary units to feed the public sector companies, a relatively cool and dust-free environ-
ment, and a relatively cosmopolitan setting.
18. India West (hereafter IW), Feb. 14, 1986, p. 1. The main frame computers will be
manufactured by Electronics Corporation of India, Ltd., in collaboration with Control Data
Corporation.
19. TOI, Dec. 24, 1985, p. 9.
20. TOI, Nov. 17, 1985, p. 1.

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 1196 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

Another government initiative is the establishment of "science cities,"

one purpose of which is to attract expatriate Indian scientists and engi-
neers to further the growth of the indigenous electronics industry. This
program was initiated in 1982 by Prime Minister Indira Gandhi, who ap-
proved the establishment of a science city in Tamil Nadu. Rajiv Gandhi is
now planning a "computer city" in Orissa, and a third science city in And-
hra Pradesh is under consideration.
Science cities, which will be partially funded by state governments, will
include Science and Technology Entrepreneurial Parks (STEPS) set up
around research institutions under the Department of Science and Tech-
nology in New Delhi. The Tamil Nadu project involves a partnership be-
tween Indus Technologies, Ltd., a Pennsylvania company, and Nilgiri
Technologies, Ltd., a private company. Forty percent of the shares will be
owned by the U.S. company. These entrepreneurs hope to take advantage
of the comparatively inexpensive skilled labor and brainpower available to
produce sophisticated software for export. India has a large number of
scientists who can be employed at about one-tenth of the cost in the United
States. The Tamil Nadu "city" includes several engineering colleges
whose graduates, it is hoped, will remain in India to work in these indus-
tries. The science cities are envisioned as nuclei around which high-tech
industries will grow.21

Export Processing Zones

The Indian Government anticipates that its free trade zones, or EPZs, also
will contribute to high-tech modernization. The Santa Cruz Electronics
EPZ (SEEPZ) was set up near Bombay in 1972 exclusively for electronics.
In EPZs, raw materials and other inputs required for production as well
as capital goods are admitted under Open General License. Such imports
are free of all customs duty, as are exports. It is stipulated that at least
30% value addition in export earnings over imports must be met. Further,
all supplies from the Domestic Tariff Area (DTA) to EPZs are treated as
exports. Most Indian laws regulating the control of economic activity are
suspended or curtailed in EPZs. One provision allows foreign companies
or large Indian companies to enter an EPZ and escape the regulations and
restrictions of the Monopolies Act. Profit repatriation is allowed without
exchange control checks and new entrepreneurs are granted a five-year tax
holiday. In addition to the package of incentives offered by the central
government, local governments may offer their own incentives to attract

21. Ivan Fera, "Fashioning Another Utopia," Illustrated Weekly of India, June 2, 1985,
pp. 20-29.

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 EDDIE J. GIRDNER 1 197

investments. Finally, special infrastructure-power, communications,

roads, and buildings-are provided for manufacturers.
Exports from SEEPZ exceeded $80 million in 1984 with over fifty units
employing 7600 workers. The assembly of peripherals, components and
software was the most typical activity. Unskilled wages ran about $40 per
month. Although minimum wage rates apply to EPZs, they are not al-
ways enforced. Protection from strikes is offered to manufacturers, as the
government has declared these zones to be under the category of public
utilities. One nonresident Indian, Manohar Lal Tandon, exports floppy
disks, magnetic heads, and stepper motors to IBM and other companies.
MNCs such as Burroughs, Intersil, and Citibank also operate in SEEPZ.
Due to the relative ease of training assembly line workers, the low cost of
labor is a major incentive for locating in an EPZ. The Ministry of Com-
merce has promised that licenses for manufacture in EPZs will be cleared
within 45 days unless complications arise due to the nature of the technol-
ogy. The government also offers a "safety net" to companies by allowing
them to "export" up to 25% of the goods produced to the DTA.22

The New Electronics Policy: Positive

Aspects and Major Constraints
So much then for the nature of the electronics industry and new policies
designed to modernize it through market openings and foreign linkages.
The major question remains. Will these policies succeed or not?
On the credit side, the NEP is realistic in its attempt to come to grips
with the need for new technology. It recognizes past failures and seeks to
achieve real growth in high-tech areas while acquiring technology from
abroad. It seeks to expand R&D and utilize the vast reserve of science and
engineering talent. It also demands performance criteria for both private
and public sectors.
On the debit side, many aspects of the NEP and economic liberalization
raise questions about whether such an approach is appropriate for India.
It relies upon elite-oriented high-tech industries rather than on consumer-
oriented production. It seeks to encourage market forces and strengthen
the private sector while draining resources from programs of poverty alle-
viation and social welfare, and it does not face the growing problem of
labor absorption and the need to improve wage rates and working condi-
tions. There are indications that the new policies may prove inflationary
and consequently be politically destabilizing. Provisions for repatriation of
profits have been made more attractive for foreign firms operating in India,

22. India)? and Foreign Review, Aug. 31, 1985, pp. 8-10.

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 1198 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

expecially in the EPZs. The rapidly increasing volume of imports threat-

ens to worsen the balance of payments problem. Still another concern is
that the policies will have a demoralizing effect on the scientific and tech-
nological community and officials of large public sector corporations.
Additionally, many fear that India will become technologically depen-
dent upon the core industrialized countries, while unable itself to acquire
the latest technologies. A related concern is that liberalized economic pol-
icies will move India toward a much closer integration of the economy into
the global capitalist economic system, thus subjecting it to world economic
recessions. In the past, semiautonomy from such shocks helped to prevent
India from falling into the debt trap experienced by many Latin American
nations. What are the merits of these criticisms? To evaluate them it is
necessary to examine more closely each of the most serious cultural, tech-
nological, economic, political, and social constraints upon the electronics
policy and economic liberalization.
Some have argued that certain features of Indian culture impose barriers
to high-tech modernization. For example, neither the private nor the pub-
lic sector encourages maximum efficiency. While there is a strong ten-
dency to blame the public sector for all past failures, it is relevant that
during the Sixth Five Year Plan, "industrial expansion in the public sector
was starved of funds and the private sector failed to make up for the
lag."23 Industrial growth fell from 5.9% at the end of the Fifth Plan to
3.7% during the Sixth Plan. Since private firms have transferred failing
units to the public sector in the past and moved on to more profitable
areas, they must share the blame for past failures.
Amiya Bagchi has pointed out that Indian businessmen have under-
mined performance in the past by intensely lobbying import and quota
restrictions when their interests were threatened. He notes that "India
fails repeatedly to fill its quota for exports to the U.S. and the European
Community," despite large government subsidies for exports in various
items.24 In contrast, the Chinese not only fill their quotas but bargain for
bigger quotas every year. Further, "business callousness and opportu-
nism" have helped sabotage antipoverty programs. As a result, Indian
businessmen have "undermined demand growth and productivity through
a better educated and better fed working class.... Indian capitalists find it
opportune to play on the utter poverty of their workers and most of their
customers to keep them degraded. The latter find no other language than

23. TOZ, Nov. 19, 1985, p. 8.

24. Amiya Bagchi, "The Economic Impact of Trust and Confidence," Far Eastern Eco-
nomic Review, May 30, 1985, pp. 78-79.

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 EDDIE J. GIRDNER 1199

that of class struggle with which to confront them."25 The perception that
India lacks an "industrial culture" has led the Japanese to have serious
reservations about manufacturing in India. It is said that "Indian manag-
ers are obsessed with class consciousness and that they distance themselves
from workers much to the detriment of developing an enlightened work
ethos."26 The Japanese criticize Indian management style, lack of produc-
tivity, and quality control and they are skeptical that the Japanese type of
management can be introduced into Indian industries.
A related cultural aspect jeopardizes the program to convince non-resi-
dent scientists and engineers to return to India where they are often humil-
iated by older intolerant scientists. The bureaucracy in Indian institutions
"blinds people from recognizing talent" and this has inhibited progress.
Scientists from abroad confront the "babu mentality." They are

exposed to a situation of conflict, deeply aggravated by class tensions and pro-

fessional discord from the pettiness of frustrated minds.... Even the smallest
functionary in the Government takes special pleasure in harassing these people
as if they had personally deprived him by going abroad.27

Consequently, many scientists become frustrated and return abroad.

Moreover, the list of those waiting to emigrate has not diminished and
many argue that the economic liberalization program will increase the
number of scientists going overseas. Those who work for foreign compa-
nies in India may view such employment as an opportunity to go abroad,
and some argue that the major beneficiaries of the program will be the
multinational corporations rather than indigenous Indian companies.
Further concerns center on the impact of the new economic policies and
importation of high technology on labor. The computer industry is capital
intensive with software and computer peripheral assembly line jobs requir-
ing little skill, and it tends to employ women at low wages. It has been
reported that some women are required to work eight hour shifts in EPZs
with only one fifteen-minute break. Moreover, there is likely to be little
job security in such industries. As Kaplinsky has commented, "the new
technology is labor displacing; how will the third world, already character-
ized with high levels of structural unemployment, be able to work through
this problem? . . . Can this be undertaken without fundamental changes
in social relationships? . . . [This] raises normative questions concerning

25. Ibid., p. 79.

26. TOI, Nov. 27, 1985, p. 7.
27. The Statesman Weekly, July 20, 1985, p. 4.

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 1200 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

the very nature of development."28 Labor absorption, which is slower in

the private than the public sector, has decreased in India from 3% a year
in the 1950s to 1.91% in the period from 1965 to 1975.29 The country also
has a large young population coming of age and entering the labor market.
There are also serious technological constraints on modernization of the
electronics sector in India. In regard to the international diffusion of tech-
nology, Luc Soete has argued that there are opportunities for developing
countries to "leapfrog" into microelectronics, and he lists five conditions
that lead to rapid industrialization: managerial skills, education and train-
ing, risk readiness, the skill requirements to operate and maintain the im-
ported technology, and absorptive capacity or the ability to adapt the
technology to local needs.30 Soete also lists four reasons why developing
nations may be able to leapfrog into microelectronics technology. First,
there is great competitive pressure on the big Japanese firms. New tech-
nology can be relocated from the Silicon Valley to Southeast Asia in less
than a year. Second, the electronics industry is characterized by rapid
growth in labor and capital productivity. Third, there is less resistance to
the "de-skilling" characteristics of the industry in the developing world.
Finally, electronics technology differs fundamentally from technical
change in both process industries (materials and chemicals) and the
mechanical and electrical industries because it relies more on scientific
knowledge and technical learning than upon productive learning by doing.
Consequently, countries such as India would likely experience fewer bot-
tlenecks in adopting electronics technology.
David O'Connor is less optimistic about leapfrogging. He lists six re-
quirements for the development of a computer industry: an extensive do-
mestic market, accumulated technological knowhow, a solid R&D
infrastructure with adequate funding, an educational system to train the
labor force, a liberal trade and foreign exchange regime along with the
requirement that MNCs continue to invest locally, and flexibility of poli-
cies in the industry toward foreign technology transfer.31
Measured by these criteria, India seems to be superior to most develop-
ing countries. There are weaknesses, however.

28. Rapheal Kaplinsky, "Electronics-based Automation and the Onset of Systemofacture:

Implications for Third World Industrialization," World Development, 13:3, 1985, p. 437.
29. Achin Vanaik, "The Rajiv Congress in Search of Stability," New Left Review 154,.
Nov.-Dec. 1985, p. 58.
30. Luc Soete, "International Diffusion of Technology, Industrial Development and Tech-
nological Leapfrogging," World Development, 13:3, 1985, pp. 409-416.
31. David O'Connor, "The Computer Industry in the Third World: Policy Options and
Constraints," World Development, 13:3, 1985, p. 322.

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 EDDIE J. GIRDNER 1201

The more dynamic business groups have actively sought modern technology
and have made massive technology imports. But Indian enterprises have not
been very good at absorbing it. As the experience of such countries as Japan
and South Korea and the examples of exceptional enterprises in India indicate,
successful absorption of borrowed technology requires substantial in-house ex-
penditure on research and development and adoptive engineering. Despite lav-
ish fiscal concessions from the Government, private R&D in India has been low
by any international standard.32

Private R&D expenditure in South Korea, which amounted to $236 mil-

lion and $283 million in 1981 and 1982, respectively, greatly exceeded that
in India-$183 million in 1981 and $166 million in 1982. South Korea's
industrial output was $29 billion compared to India's $47.5 billion. But
since India's population is 18 times that of South Korea, the per capita
difference in R&D spending is very large. More than 500 collaboration
agreements in electronics have not yet resulted in a high level of technol-
ogy in India. To help insure technology transfer, India should insist that
the imported technology is both the best and most appropriate, given for-
eign exchange constraints, and agreements should provide access to fur-
ther improvements being made abroad to the imported technology. R&D
funding and infrastructure should be sufficient to insure absorption and
development of the technology for local needs, and there is a need for close
collaboration between research labs and colleges and universities.33
India has a relatively strong infrastructure through which R&D could
be increased, including the Tata Institute of Fundamental Research, the
Central Electronics Engineering Research Institute, the Indian Institute of
Science, and five institutes of technology. The Indian government set up
the National Microelectronics Council in January 1985 to plan, coordi-
nate, and implement the research program. Yet, some argue that the
R&D requirements are so formidable today that no developing country
will be able to compete with large MNCs such as IBM, Burroughs, and
Honeywell. An R&D budget of a billion dollars is needed to produce a
superchip with 10 million transisters. Even the Indian government's goal
of producing chips with one million transisters each is ambitious.
Critics of the NEP have argued that it lacks coordination and does not
take into account India's development priorities. They fear it may lead to
growth without development as the export industries are oriented toward
the outside rather than India. Other difficulties include the increased tech-
nological protectionism practiced by some countries at a time when India
wants to export more, the heightened concern with security in the United

32. Bagchi, "The Economic Impact," pp. 78-79.

33. EPW, Jan. 5, 1985, p. 10.

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 1202 ASIAN SURVEY, VOL. XXVII, NO. II, NOVEMBER 1987

States, competition from China, and an unstable market for some exports.
On the local level, it will be necessary to deal with problems of load-shed-
ding, irregularities in the power supply, heat, dust, and lack of skilled
maintenance personnel. These factors will surely add to the costs of oper-
ating and maintaining computer systems in India. Many also fear that
greater imports of high technology will lead to rising deficits in the balance
of payments. Since 1980, the current account deficit has been running
around 1.5 to 2% of GDP as a result of import liberalization and the sec-
ond oil shock of 1979. Imports are expected to grow at around 6.4% a
year during the Seventh Plan period (1985-90), and this already has led to
a sharp increase in foreign borrowing. According to a World Bank Re-
port, exports will have to take up the slack and their growth will have to
accelerate from a 4.5% rate to 7% in 1986 and to 9% by 1989-90. Even if
the export growth targets are met, the debt-service ratio will increase from
15.5% presently to 21.6% by 1989-90, and to 24% in the late 1990s.34
Some observers are optimistic that the new economic policies will wean
India from an ideological commitment to Indian socialism. The Left, on
the other hand, charges that Rajiv Gandhi has opened up the economy to
exploitation by foreign MNCs and abandoned the 300 million people living
in poverty. Some economists, reflecting the increased impact of the
monetarist school, have even theorized the possibility of a Laffer curve,
whereby the new reduction in tax rates would lead to an increase in gov-
ernment revenue. More realistically, the NEP and economic liberalization
aim at greater pragmatism, but are constrained by well entrenched na-
tional values. The Indian political and social ethos calls for a concern for
social welfare and accepts the notion that science and technology should
be guided by the ethical values of society. As the past has shown, it will
not be politically or economically feasible to abandon these concerns.
There appears to be no shortage of available capital in India for new
ventures. In 1985, India's capital market raised $2.1 billion or ten times
that of 1980, which sets India apart from most other developing countries.
It is significant that many individuals who in the past kept their savings in
gold or in the bank are now investing in the stock market, and the Seventh
Plan stresses enlarging the role of stocks in generating funds for industrial
expansion. Companies are also raising funds through debentures which
pay around 12% interest. The savings rate in India is relatively high at
around 23.3% and is expected to increase to 24.5% by 1990. The Indo-
American Chamber of Commerce encourages nonresident Indians to in-
vest in Indian and joint venture companies. India's rapid entry into the

34. Far Eastern Economic Review, Oct. 17, 1985, p. 87.

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 EDDIE J. GIRDNER 1203

global capital markets has spurred Bear Stearns and Company to launch a
program to mobilize 500 million to one billion dollars in nonresident In-
dian funds in the next two to three years. The Indian government hopes to
tap about $1.66 billion a year from nonresident Indians. The Federation
of Indian Chambers of Commerce and Industry has suggested creating a
corporate savings trust, which would help tap the savings of households in
small towns and rural areas; selling shares in Indian companies on foreign
stock exchanges; and abolishing income taxes on dividends. These devel-
opments underline the expanding role of the private sector in the Indian
economy.

Conclusion
This article has examined the major features of the New Electronics Policy
in India as an important test of renewed efforts to liberalize the economy.
While it is clear that major changes are needed to encourage moderniza-
tion in India's electronics and telecommunications industries, there is
much disagreement about the likely impact of these efforts, whether they
can be implemented, and if they can, whether they will succeed in spurring
growth and making India competitive in the world market. There is also
much disagreement over which classes in Indian society will benefit from
these policies.
Indeed, the larger debate surrounding efforts toward liberalization dem-
onstrates the serious cultural, technological, economic, political, and social
constraints that must be overcome.35 By far the most limiting of these are
political and social. Opposition to liberalization and high technology mod-
ernization is mounting from labor unions, the intellectual left, the bureau-
cracy, the "swadeshi lobby," and from many businessmen. In contrast to
South Korea and Taiwan, where bureaucratic-authoritarian states exclude
labor from decision making and enjoy a large degree of autonomy from
society, more democratic societies such as India find it harder to dismantle
the controls and protections that accompany the import substitution strat-
egy. As Stephen Haggard has observed, while the success of export-led
growth in East Asia has led some analysts to assume that policies can be
easily transplanted, "continuing import substitution is a more reasonable
strategy in large countries than in smaller ones."36 Similarly, John Ruggie
has pointed out that "the export promoting strategy cannot be exploited by

35. See Myron Weiner, "The Political Economy of Industrial Growth in India," World
Politics, 38:4, 1986, and Stanley A. Kochanek, "Regulation Theology In India," Asian Sur-
vey, 26:12, December 1986.
36. Stephen Haggard, "The Newly Industrializing Countries in the International System,"
World Politics, 38:2, 1986, p. 360.

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 1204 ASIAN SURVEY, VOL. XXVII, NO. 11, NOVEMBER 1987

political regimes that cannot successfully address the distributional con-

flicts that would follow this strategy."37 While economic growth has been
higher in authoritarian countries, inequalities have grown and foreign
debts have risen sharply.38 This suggests that it may be necessary for more
democratic countries to settle for more moderate growth.
Since independence, India's essentially capitalist political economy has
been shaped by Mahatma Gandhi's vision of decentralized and self-suffi-
cient production and Jawaharlal Nehru's vision of state-guided Indian so-
cialism. While these perspectives, which are part of the Indian social and
political ethos, will continue to influence economic thinking and policy
making, many analysts have come to see this legacy as outmoded and in-
compatible with India's efforts to compete in the world market. It is
blamed for the large and inefficient public sector and an import substitu-
tion strategy that has insulated India from world competition. While from
a conventional economic standpoint this criticism is valid, it is important
to recognize the values embedded in the political and economic ideas of
Gandhi and Nehru, which seek the uplift of all and greater social and
economic justice, as positive and deeply rooted in Indian soil. These can-
not and should not be abandoned in the name of economic liberalization,
efficiency, and production. While Rajiv Gandhi is correct in his efforts to
root out corruption, mismanagement, and overregulation and to remove
the barriers to modernization in many areas, it would be foolish to look to
South Korea or Taiwan for an economic model for India to emulate. Dis-
tributional issues are certain to remain at the top of the agenda for Indian
policy makers for the forseeable future, and it would be a grievous error
for them to pursue an elitist pattern of development that neglects the mil-
lions who remain in poverty. The real challenge facing Indian leadership
is not that of producing a mass consumer-oriented society, but developing
a different pattern of growth that could not only provide the material
needs of all, but preserve the spiritual foundations of Indian society in
balance with the natural environment. Such a society might then employ
science and technology in the interests of all humanity and be truly worthy
of emulation.

37. Bhagwati, "Rethinking Trade Strategy," p. 101.

38. Atul Kohli, "Democracy and Development," in Lewis and Kallab, eds., Development
Strategies Reconsidered, pp. 153-154.

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