India takes the slow road to reform

KK Kapoor's 10-rupee (18p) Hindi-pop cassettes sound so good because his factories use the latest dubbing machines from Denmark. Yet every time he needs to import replacement parts he's forced to pay huge tariffs, show folders jammed with documents and even bribe customs officials.

"They treat you like a cheat. I'm a businessman, not a cheat," he says from his windowless office in Bombay, originally a recording studio for his company. Kapco International churns out three million cassettes a year to fill orders from music companies like Sony Music Corp, but "even getting something cleared [by customs] in one week is a major achievement".

Even as India celebrates half a century of independence from British rule, it is finding that economic freedom is still elusive. The country is struggling to dismantle bureaucratic barriers erected during decades of Soviet-style central planning.

Reform has only begun in the last few years after inefficiency had pushed the country to the brink of bankruptcy, forcing it in 1991 to lower taxes and tariffs and, at least on paper, allow companies greater freedom.

Businesses say India has more work to do. India's growth rate has nearly doubled to 8 per cent since it opened its market to foreign goods and investment and gave companies and consumers greater choice. With more reform, it can grow 6-10 per cent a year for the next five years. Without, it risks returning to the "Hindu rate of growth", or about 4 per cent a year.

"If we could just let the bureaucrats sit idle for a while and tell them not to interfere, we could see miracles happen," says B.B. Bhattacharya, professor of economics at the Institute of Economic Growth at the University of Delhi.

India's first prime minister, Jawaharlal Nehru, chose socialism for India's economy, promoting industry through price controls and trade restriction, while Indira Gandhi nationalised banks and insurance companies, slapped controls on food prices and even kicked IBM and Coca-Cola out of India.

The central government ballooned to more than four million officials from 1.4 million 50 years ago. Red tape proliferated, forcing companies to seek approval from bureaucrats on what they produced, how much they sold it for and who they could fire. There are now 79 government departments, including the Development Commission for Handlooms and the Directorate of Vegetable Oils and Fats.

Enron Corp, the US power service company, had pumped $300m (pounds 190m) into a new power plant near Bombay, received government approval and signed contracts when the state of Maharashtra decided Enron was overcharging, shut the project and forced it to renegotiate.

Indian companies are also hurting. Most of the country's 246 state-controlled concerns are unprofitable. India's biggest companies were nurtured by government "guidance" that put regional development, job creation, or limiting imports before profits. It's still difficult to fire staff. Many state-owned companies are overmanned and it's nearly impossible to get government approval to fire people. Often layoffs lead to strikes.

When India's air traffic controllers went on strike in April thousands were left stranded at airports in Europe and Asia. The walkout was sparked by the Director General of Civil Aviation's attempts to reprimand controllers linked to a mid-air collision in October that killed more than 300 people.

But even minor changes can improve production for badly-managed companies. Take the power problems of India's third-largest city, Calcutta. Because the state of West Bengal's power plants were running at one-quarter of capacity, power would cut out for six hours each day. Those who could afford to bought their own generators to guarantee power for their lights, air conditioners and computers.

The state appointed Sanker Kumar Sen, a retired professor, as minister of power to reorganise its power company. He didn't have to lay off employees or build new power plants to succeed. He just asked the government for a free hand to promote productive employees and tell the rest to stay out of the way. The state of Calcutta now has a stable power supply and exports electricity to other states.

Even Hindustan Motors' chunky Ambassador car, once one of the only models on India's roads because of restrictions, has been improved amid competition from Ford and Suzuki. Customers can now buy an Ambassador with a stronger, quieter engine - and without waiting two years, as used to be common.

Hindustan Motors is about to spend 1bn rupees (about pounds 18m) on modernising its factory so the car's doors will fit better and shut without squeaking. It has no plans to change the design of the Ambassador, which has looked the same for the past 40 years. Because the body of the Ambassador is 2ft off the ground, it's protected from the giant potholes of country roads, it says.

"It's good to be a tank," says C.K. Rao, vice-president of marketing. And with its improved interiors, "it feels like you are sitting in your living room".

The reforms have opened doors in India for industries that are just taking off. The cassette-maker Mr Kapoor says the government allows a wider variety of imports now, so he has decided to diversify into importing soft ice- cream machines. "The approval system has been simplified," he says. "But the customs people still get in the way."