india and superpowers

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India and the Super Powers: Deviation or Continuity in Foreign Policy?Author(s): Baldev Raj NayarSource: Economic and Political Weekly, Vol. 12, No. 30 (Jul. 23, 1977), pp. 1185-1189Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4365798 .

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SPECIALARTICLES

I n d i a a n d t h e S u p e r P o w e r sDeviation or Continuity in Foreign Policy?

BaldevRaj NayarThe drastic political changein Indiaafter the March Lok Sabhaelections could not be without amajor impact on foreign policy.However, the euphoria about foreign policy shifts following the changeof governmentrequiresaslightly more critical examination.A little historicalperspectivewill show that the initial statements ofthe new governmentmark not sb much a departureas a newstage in an evolutionarydevelopment nitiat-ed by the Congressgovernment.

OVER the years, as a result of a clashof roles between the United Statesas a superpower and India as a mid-dle power, a structure of alignmenthad developed by the mid-70s where-by the US was linked with China,Pakistan and Iran, while India waslinked with the Soviet Union. 1 Al-though surface appearances are oftendeceptive, this structure of alignmentseemed to have acquired a frozenquality, with the different partnersapparently locked into somewhat rigidpositions. Then in mid-March 1977 amomentous event occurred in India,resulting in a massive defeat forPrime Minister Indira Gandhi andthe ruling Congress party by theJanata party consisting of a leadershipthat she had put in jail prior to theelections.There was great exultation inthe American administration at thismajor act of political surgery in India,and a keen expectation that the newgovernment would seek better rela-tions with the United States. The UShad already received strong signals inregard to the latter development.Even before the elections were com-pleted, Morarji Desai told an Ameri-can correspondent - who describedDesai as one "who strongly opposesCommunism" that as Prime Minis-ter he would immediately make apolicy declaration that would gladdenIndia's friends in the West, announc-ing a return to true non-alignment,and that he would not let the Indo-Soviet treaty stand in the way ofequal friendship with any other power.2Two days later, on March 22, 1977,after the overwhelming defeat of theCongress party had become clear, theNew York Times editorialised:

Of partigular importance to theUnited States is the expected shiftin foreign policy. The attitude ofthe Congress party, which has ruledsince independence,, has varied from

a self-righteous edginess toward theWest to a chilliness bordering onhostility. All indications from thevictorious alliance, known as Janata,are that a friendly attitude can beexpected toward the United States,with a noticeable cooling of feelingsfor the Soviet Union. Whatever itsforeign policy, India has begun toearn a new claim on Americansympathies, and perhaps aid.True to his word, at the press confer-ence soon after being sworn in as PrimeMinister, Desai declared in an appar-ent major foreign policy shift, "Wedo not have any special relations withany country". India, he said, wouldbe "properly non-aligned", pursuingfriendship with all countries on thebasis of reciprocity and not lettingthe Indo-Soviet treaty come in theway; he then stated somewhat provo-catively, "It is left to Russia to dowhatever they want".3

After this declaration, the NewYork Times reported that "the im-plied Indian loosening of ties to theSoviet Union can also only be satis-fying to Washington". The US ad-ministration also "noted with inter-est" Desai's statement on abstinencefrom nuclear weapons, "suggesting ashift in India's nuclear policy thatmight move New Delhi and Washing-ton closer to agreement on the ques-tion".4 Sulzberger underlined that"Moscow's relations with India havebeen worsesnedby the election".5 Theseemingly far-reaching new possibili-ties opened up for Washington weremost dramatically expressed by JosephKraft:The setback suffered by Mrs Gandhiand the Congress party in Indiatilts the world balance of power. Itoffers fresh opportunities to thiscountry and - even more - itsquasi-ally, China, to advance theirpositions at the expense of the So-viet Union... That suggests a turn-ing to the United States and theworld community for aid... Together

China and India would probablywork to limit Soviet influence in- Indochina... All these possibilitiesrepresent something of a windfallfor Washington.6For the obvious discomfiture causedto the Soviet Union and the prospectof Indian alienation from the SovietUnion, China too greeted fulsomelythe defeat of Indira Gandhi and hergovernment.

Obviously, a drastic political changein India, after what many Indians havereferredcto as 'the dark night' and 'atraumatic experience', could not bewithout a major impact on policy.Often, merely change in personnel re-sults in policy shifts even as commit-ment is expressed for older postures.However, the euphoria about foreignpolicy shifts following the change ingovernment in India requires a slight-ly more critical examination. A littlehistorical perspective would demons-trate that the initial statements ofPrime Minister Desai did not mark anew departure but rather a new stagein an evolutionary development initiat-ed by Indira Gandhi and her govern-ment.

India had deepened its relationshipwith the Soviet Union in the 1960sfollowing the American reluctance toassist it in building its military capa-bilities after the Sino-Indian borderclashes in 1962. Later, India's diplo-matic isolation and helpless plight in1971, burdened with 10 million re-fugees, while the US and China ren-dered political and material supp9rt toPakistan, tacitly and openly, droveIndia into a treaty that year with theSoviet Union to secure diplomatic pro-tection in its endeavour to cope withits critical situation. The result of theensuing war was the achievement byIndia of a pre-eminent position on thesub-continent, a status that it securedagainst the vigorous opposition of the

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July 23, 1977 ECONOMIC AND POLITICAL WEEKLYUS and China, but with the crucialsupport of the Soviet Union. Soonthereafter, Indira Gandhi told C LSulzberger that "We Indians are un-able to be grateful to anybody", andIndia eagerly asserted its independenceby insisting on negotiating directly andbilaterally with Pakistan rather thanunder Soviet auspices as at Tashkentafter the 1965 war. Subsequently, theIndians expressed a desire for friend-ship with the US through a statementby Foreign Minister Swaran Singh-which the New York Times labled"Indian Love Call" and gratuitouslyattributed to Indian need for foodin which he underlined the sentimentthat "we cherish common values ofan abiding nature such as our beliefin democracy and a democratic wayof life, individual liberty and humandignity". A thaw gradually developedin Indo-US relations, and in duecourse the US made gestures towarda tentative, but in reality only sym-bolic, accommodation with India asthe region's pre-eminent power. Thisprocess reached its climax with Secre-tary Kissinger's visit to New Delhi in1974, when apparently "a new page"was turned, with Kissinger acceptingnon-alignment and acknowledging, that"the size and position of India give it aspecial role of leadership in South Asiaand in world affairs". Joint commis-sions were established to give moresubstance to the relationships betweenthe two countries.

The process of reconciliation wasrudely disrupted, however, with thelifting of the arms embargo by theUS and the opening of the arms pipe-line to Pakistan in early 1975. Des-pite that, the two countries continuedto maintain a dialogue through thejoint commissions. The declaration ofthe Emergency in mid-1975 strained re-lations further, following the expers-sion of disappointment by US officialsand the strident criticism by the Ame-rican mass mec,ia. American observ-ers even speculated that India mightattack their ally Pakistan in order torally mass support. On the other hand,the Soviet Union and its allies ex-tended support to the Indian govern-ment. It is likely that- the SovietUnion soon regretted having expressedsuch support. For in the first half of1976, the government of Indira Gandhiundertook a series of swift foreignpolicy initiatives which had the poten-tiality of altering the inherited patternof relationships with the major powers.In April the government called for ameeting between India and Pakistan

to resume diplomatic and trade links,which resumption took place subse-quently. A few days later, it announcedagreement between India and Chinato exchange ambassadors after a breakof some 14 years, signalling a thaw.Around the same time, AmericanAmbassador Saxbe announced that re-lations between India and the US werebeginning to thaw. The momentousnature of these events was not lost onobservers. One major American news-paper noted editorially:Leonid Brezhnev has seen India asthe key link in a Soviet-dominatedchain of states Moscow has soughtto create in Asia for the contain-ment of China.Now all these past calculations havebeen upset by the new possibilityof a Sino-Indian rapprochement.7At the same time, it called attentionto "the radical potentialities forworld balance of power as a wholearising from the Sino-Indian decisionto exchange ambassadors". And twodays later, it returned to the subject:It is most unlikely that mere coin-cidence is at work when New Delhiannounces within a few days that itwill exchange ambassadors withChina and that it will take steps tonormalise relations with Pakistan,its two principal enemies duringthe past decade or more. In the sameperiod, United States AmbassadorWilliam B Saxbe proclaims that hesees improvements in United States-Indian relations... this turn in In-dian foreign policy has to be greet-ed enthusiastically by all who wisha more peaceful atmosphere in Asia.The one capital where there isprobably concern about Mrs Gandhi'snew activist peace policy is Mos-cow... the Soviet Union will haveto recognise that India is achievinggreater freedom of action as sheseeks a wider variety of friendsthroughout the world.8The assertion of Indian independ-ence in relation to the Soviet Unionthus has been of much earlier originthan the installation of the Janata gov-ernment. Indeed, it could be placedeven earlier - the nuclear explosionof 1974, which was no less unaccep-table to the Soviet Union thanto the US, or perhaps to thebilateral process of negotiations withPakistan at Simla in 1972. The basicreason for this assertion would seemto be that India's earlier intimacy withthe Soviet Union was congruent withits situation in the region's power con-figuration; once India's power positionin the subcontinent changed in 1971it could not be without impact on itsdiplomatic posture. It is well to re-member that that position was achiev-ed with Soviet support, but in the

teeth of opposition from the US andChina. It may well be that, as Ambas-sador Saxbe put it, "that honeymoonis about over, simply because the In-dians are beginning to realise theyare being used".9 Lacking any speci-fication about what the Indians werebeing used for, that interpretationwould seem to be unreliable. To de-monstrate that India's opening toother countries would not be at thecost of its relationship with the So-viet Union, Prime Minister IndiraGandhi visited the Soviet Union inJune 1976. More to the point perhapsis the notion that the Indians hadgotten out of the Russians all theycould possibly get by way of- trade,technology and diplomacy, and thatnow benefits lay for them, as they didfor the Russians, in a closer relation-ship with the West. Also, there mayhave been consciousness of greaterarms self-reliance; as a European dip-lomat told the New York Times cor-respondent,' William Borders: "AsIndia's arms dependence on the bigpowers decreases - and it is decreas-ing rapidly - the big powers' influ-ence over the course of events in thispart of the world is also reduced."10Additionally, the end of the Vietnamwar had removed one salient point offriction between India and the US.

At any rate, the second half of1976 saw frequent expressions aboutimprovement in India-US relations. InJune, at home in Mechanicsburg, Ohio,for a visit, Ambassador Saxbe statedthat relations between the two coun-tries were improving. In November, hefelt "encouraged" about the improve-ment, stating there were "no basicproblems". Again, that "we have turn-ed it around. It has been a slow pro-cess, but I'm pleased with the deve-lopments". 11 Around the same time,retiring Ambassador Kaul declaredthat relations were "much better now"than during 1971-73, and predicted "amarked improvement" soon. 12 Newly-designated Ambassador Kewal Singhnoted "there are no basic issues onwhich we have fundamentally opposedpoints of view", and envisioned "avery bright future" for Indo-US rela-tions. Later, he announced that "inthe last two years, good efforts havebeen made to build up our relations ina manner that they have become ma-ture". Again, he stated, "the legacy ofmistrust and misunderstanding ishappily a thing of the past". 13

Not all was smooth sailing, however.Two major irritants continued to dogrelations betwveen the two- countries:1186


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ECONOMIC AND- POLITICAL WEEKLY Jly 23, 1977arms transfers to Pakistan and with-holding of enriched uranium shipmentsto India. Prime Minister Indira Gandhiseveral times expressed concern at thearms transfetrs to India's neighbours.On the reported prospective sale of110 A-7 jet bombers, the Times ofIndia in an editorial on November 19,1976 chided: "The Pentagon's reportedargument that there need be no armsrace in the subcontinent as a result ofthe A-7 deal is patently disingenuous."On the uranium shipments, it must haveseemed to the Indians that PresidentFord was using American leverage tomodify Indian policies much as Presi-dent Johnson had used food shipments.The final decisions on these questionswere, however, left over to the Carteradministration.

The election of Carter raised ex-pectations of an improved relationshipto a new height. Democratic adminis-trations, though sometimes mistaken-ly, are often expected to be morefriendly towards India. Although ad-vocating a 'low posture' policy towardSouth Asia, the Democratic party plat-form had already recognised that "In-dia has now achieved a considerabledegree of hegemony over the sub-continent" and suggested "that fu-ture American policy should acceptthis fact". Even before the inaugura-tion of the Carter administration,Times of India correspondent inWashington cabled that he foresaw "anew chapter in Indo-American * rela-tions" and that Ambassador KewalSingh "has already sensed this in hismany talks with lea(ding members ofthe Eastern establishment". After theinauguration, he reported that "strongsignals are being exchanged betweenWashington and New Delhi that spellhappier times for Indo-American rela-tions. A determination to put backthese relations on their rails on thepart of the Carter administration isbecoming increasingly evident to ob-servers here." He continued: "Theattention that Indian officials are re-ceiving at the highest levels of gov-ernment can only be construed tomean that a sea-change is coming overIndo-American relations that augurwell for the future." 14 Meanwhile, bythe end of 1976, the American newsmedia had toned down its criticism ofthe Emergency, apparently impressedeither by its prospective permanenceor by its economic gains, given thelaudatory reports of the World Bank.After the Indian elections wereannounced, President Carter told Am.bassador Kewal Singh, "very! good

news" from India, India was "verymuch in our hearts", and "my motherwas 'ambassador' to India".As for the Indiaft government inrelation to these new developments,the Samachar news agency celebratedIndira Gandhi's ten years in office byreporting that in regard to the US"Mrs Gandhi looks forward to furtherstrengthening of friendship for mutualbenefit and in the cause of interna-tional understanding and co-operation".More significantly, in an interviewwith Polish correspondents a few daysearlier, Indira Gandhi stated that Indianeither sought any exclusive relation-ship nor thought its relations withany one country should affect or be atthe cost of its bilateral relations withother countries. 15

It can thus be seen that the ap-parent assertion of independence fromthe Soviet Union by India and theapparent cordiality between India andthe US was not something generatedwith the inauguration of the Janatagovernment in India, though IndiraGandhi left behind to the successor gov-ernment a greater margin of manoeu-vrability, having accumulated a foodbuffer stock of 20 million tons andforeign exchange reserves of some$3 billion. At the same time, despitethe degree to which the new govern-ment's intentions departed sharplyfrom the previous pattern of India'srelationships, it soon became obviousthat the exercise of power and res-ponsibility had persuaded the newgovernment to retract from its hastydeclarations. Within a week of thenew government's formation, ForeignMinister Atal Bihari Vaipayee ruled outany change in foreign policy; hedeclared that "foreign policy was notan issue in the election campaign",that "there has always been a broadnational consensus on external affairs",and that the government stood by itscommitments. 16 Soon thereafter camethe announcement that Soviet ForeignMinister Gromyko would visit NewDelhi near the end of April, an ap-parent indication of the priority Mos-cow gave India in its foreign policy.Meanwhile, Vaipayee expressed confid-ence in an interview with Soviet tele-vision about further strengthening thefriendly relations between India andthe Soviet Union. The new govern-ment apparently made a serious reviewof the Indo-Soviet treaty and it isinstructive to note that strictly on itsown, two days before Gromyko's arri-val, the Indian government announcedthat it would not cancel the treaty,

stating "India stands by its foreignpolicy obligations". 17 It was obviousthat the Indian government had nowish to alienate the Soviet Union. Ina pithy article, a perceptive Americanhad predicted why it should be so:"no Indian government is likely toforesake the 'spcial relationship' withthe Soviet Union so long as there is aChina."18 And casting the net wider,the normally pro-American editor ofthe Times of India, Girilal Jain, ad-monished: "It will be dangerous forthis country to lean in other directionswithout the anchorsheet of firm andclose ties with the Soviet Union, be-cause it can thereby open itself tomanipulation by the West, particular-ly the United States, which thoughmaimed, has not ceased arrogating toitself the role of establishing a so-call-ed stable world order under its aus-pices." 19

Subsequently, the Gromyko visitended with an affirmation of the treaty,of their "identical or close" positionson many international question, andof their determination to strengthenrelations; aid agreements were alsosigned. Vajpayee assured the SovietUnion: "The bonds of friendship bet-ween the two countries are strongenough to survive the demands ofdivergent systems, the fate of an indi-vidual and the fortunes of a politicalparty. In the changing internationalsituation over the years Indo-Sovietfriendship has remained a constant fac-tor for peace and stability in Asia andthe world.'u2 Meanwhile, high-levelcontacts were maintained between thetwo countries, including the visit toNew Delhi of the Soviet commander-in-chief. No small part in the conti-nued Indian protestations of friendshipfor the Soviet Union may, of course,have been played by Indian require-ments of sophisticated military equip-ment and oil supplies.The determination to maintain goodrelations with the Soviet Union doesnot detract from the vast improvementin India-US relations, with a somewhatemotional quality on the part of In-dian leaders, because of their experi-ence with the loss of civil libertiesduring the Emergency and with thelack of earlier direct experience of anencounter with American power. Thisbecame especially marked after thedecision to resume uranium ship-ments, the cancellation of the A-7bomber deal with Pakistan, and theprospect of renewed bilateral econo-

mic aid. However, several limits tointimacy between the two countries1187


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July 23, 1977 ECONOMIC AND POLITICAL WEEKLYmust induce caution about their fu-ture mutual relationships.First and foremost, the fundamentalaim of US foreign policy since WorldWar II has been, and continues to be,the containment of the Soviet Union,and it is doubtful if India will everbe a party to this containment. Here,China is a more serviceable instrumentfor the US and the level of Americanintimacy with India, including bilate-ral aid, is more likely to be determin-ed by China's wishes, though the USmay refrain from pushing India into adeeper relationship with the SovietUnion. For India to move closer tothe US at the cost of its relationshipwith the Soviet Union would behazardous, for while India may beable under certain circumstances tomoderate to some extent possible UShostility or indifference on the basisof common political values, a SovietUnion aligned with Pakistan wouldpose real problems for India.Secondly, while the new governmentof India will be appreciative, becauseof its own experience, of PresidentCarter's stand on human rights andwill likely make it a plank to push forcloser bilateral relations with the US,it will be reluctant to make it an issuein relation to the Soviet Union - justlike the US does not make it an issuein relation to China - especiallywhen India is itself so vulnerable onits own neglect of even more funda-mental economic rights for the masses.

Thirdly, arms transfers to India'sneighbours will remain an irritant. TheAmerican reluctance to supply someitems will be taken less note of forIndian gratitude than the- vastly lar-ger arms transfers that will continueto be made. The US is not likely toleave the region for India's sake. Itis instructive to note that, like In-dian officials before him, ForeignMinister Vajpayee was saying as lateas May 1977 that he hoped for im-proved relations with the US but hadto point out that there were somemajor irritants between the two coun-tries, such as arms supplies to Pakis-tan and withholding of uranium ship-ments to India. 21Fourthly, it would seem - at leastaccording to one American sociologistthat, despite the talk of the 'loveaffair' with India, Americans aremore comfortable with an India thatis not friendly, especially in contrastwith China. Nathan Glazer argues:Specifically, consider the history ofthe American image of India. Povertyhas always been part of that image.Spirituality in the service of politi-

cal' ends, as in the case of Gandhi,has been part of that image. Whenwe are on good terms with India,we think of making a contributionto solving India's poverty, and weare impressed by such statesmen asGandhi and Nehru. When we areon bad terms, we see poverty asIndia's fault and get impatient withit, and we see the strong and distinc-tive line of Indian leaders as sanc-tified hypocrites. The change fromone form to another is in a large mea-sure the result of policy changes...In time, the reasons for the dete-rioration in relations is forgotten,and what is left is the reality of badrelations which affect the valence ofthe long-held images of India... Justas we may admire at one point theIndian emphasis oir religion, anddenounce it as superstition thenext, so we may admire Chinese in-telligence and hard work at onepoint, and fear it as serving devi-lish ends at another. What is notpossible is to see Indians as totallyindifferent to their religious pre-cepts, or to see Chinese as lazyand stupid... As Harold Isaacs de-monstrated, Americans- because oftheir image of China seem pre-disposed to be friendly and positivetoward that country; because oftheir image of India, they are pre-disposed to be less positive and lessfriendly. This does not mean thatpolicy considerations may not leadus to be closer to India than toChina... but the weight of the im-ages held seem to make most Ame-ricans happy with the opposite ar-rangement.2Psychological explanations are oftenhazardous, but it is significant that thenegative images are strongly held byAmericans. While Senator Moynihancould exult at the peaceful transfer ofpower in India in March 1977, he hadearlier, in the same month in an inter-view with Playboy, said: "When Indiaceased to be a- democracy, our actualinterest there just plummeted. I mean,what does it export but communicabledisease?" And not long ago, seriousmen in the US were recommendingthe 'triage' treatment for India.

Fifthly, at a political level, there isthe irritant associated with the nuclearquestion. American pressure to enticeor coerce India into accepting safe-gdards on its nuclear installations willnot only be resented but will be resist-ed, especially with the new governmenthaving to face an opposition which willbe ready to call any concession on thispoint a surrender to the US. Even ifthe present government concedes onthis point, even if privately, it willonly signal. serious trouble in thefuture, for Morarji Desai is not im-mortal and his government has nopermanent mandate, and Indian foreignpolicy is responsive to larger social

forces which run counter to any limi-tations on India's future options.Most fundamentally, the US has toconfront the question whether it ac-cepts India, not just symbolically butsubstantively, for what it is or thinksit is - a potential major power. Inthe post-war period, US policy hasbeen to oppose the major regionalpower through alliances with itssmaller neighbours. The question nowis whether the US is ready to reversethis inherited posture and pursue apolicy of accommodation - rather thanof containment and satellisationtoward-the regional power. In the caseof India, the issue has not been betterexpressed than by Myron Weiner: "Itremains to be seen whether the Uni-ted States develops an adversary re-lationship with India driving it stillfurther into the Soviet arena, or isresponsive to India's quest for a largerrole in regional and international poli-tics."23 This, indeed, is the criticalissue in the relations- between thetwo countries, all else is subordinate.No amount of foreign aid will sub-stitute for it.

A policy of accommodation towardIndia as one of the regional powerswould, however, require, in the wordsof a former US official, "Americanacquiescence in the policies they fol-low within their regions and non-in-terference in their relations with theirneighbours".24 This would raise ques-tions about the entire structure ofUS relationships with the region, notjust of bilaterally improving relation-ships witn India. And these questionsare not likely to be decided on thebasis of personalities or - politicalvalues, but in the final analysis andover the long-term considerationsof power and interest. It is well toremember that both -President andCongress share powers in foreignpolicy, and that there is no domesticconstituency for India in the US asthere is for Israel and Africa.

Notes1 On the argument and documenta-tion, see Baldev Raj Nayar, "Ame-rican Geopolitics and India",(New Delhi: Manohar, 1976).2 Henry Kamm, New York Times,March 20, 1977.3 Statesman Weekly, March 26,1977; Montreal Star, March 25,1977.4 New York Times, March 27, 1977.5 Ibid, April 3, 1977.6 Washington Post, March 22, 1977.7 "Sino-Indian Thaw", New YorkTimes, April 19, 1976.

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ECONOMIC AND POLITICAL WEEKLY July 23, 19778 "India's Peace Drive", ibid, April21, 1976.9 US News and World Report,LXXXII, No 3 (January 24, 1977),pp 41-42.10 Montreal Star, April 14, 1976.11 Times of India, June 28, 1976;

New York Times, November 18,1976; Times of India, November18, 1976.12 lbid, November 3, 1976.13 New York Times, September 20,1976; Times of India, November23, 1976 and December 18, 1976.14 Times of India, July 21, 1976,

January 6 and 24, 1977.15 Ibid, January 24, 1977, and Janu-ary 21, 1977.16 New York Times, March 31, 1977;Statesman Weekly, April 2, 1977.17 New York Times, April 24, 1977,p 11.18 T D Allman, "India's Images inthe US Mirror", ibid, April 24,1977.19 Ibid, April 25, 1977.20 Statesman Weekly, April 30,1977.21 Ibid, May 28, 1977.22 Nathan Glazer, 'From Ruth Bene-dict to Herman Kahn', in Akira

Ariye (ed), "Mutual Images:Essays in American-Japanese Re-lations" (Cambridge: HarvardUniversity Press, 1975), pp 167-68.23 Myron Weiner, 'Critical Choicesfor India and America', in DonaldC Hellman (ed), "Southern Asia:The Politics of Poverty and Peace"(Lexington, Mass: LexingtonBooks, 1976), p 78.24 William I Barnds, in US House ofRepr,esentatives# Committee onForeign Affairs, "United StatesInterests in and Policies TowardSouth Asia" (Hearings; 93rd Con-gress, 1st Session; 1973), p 129.

Financing N e w Industrial VenturesSome Inhibiting Factors

D R PendseSeveraldeterrentfactors have been responsible or the unsatisfactoryperformanceof private sectorindustry.By far the most importantof these, the author argues, have to do with the financingof newindustrialventures. This article discusses some of these problems and suggests for discussion possiblelines of dealing with them.IF our resolve to remove poverty andunemployment has to become a realityin the foreseeable future, there is noescape from our having to conceiveand implement a large number ofnew industrial projects. Recent trendsin investment have however beenvery discouraging, entirely deservingthe description 'investment crisis' inthe Janata party manifesto. Severaldeterrents were responsible for thisinadequate performance of industry.These have lately received some at-tention and analysis. But by far themost serious single deterrent, parti-cularly for the private 'sector, lies inthe set of problems of financing newindustrial ventures. These have nowbecome king-size, but they are man-made, and, happily, by no means in-superable. This arti6le will express con-structive dissatisfaction at some ofthese and suggest for discussion somelines of tackling them. Three prob-lems will be highlighted viz, (a) thedebt-enquiry ratio; (b) delay and (iii)the convertibilty clause.

A new industrial project in the pri-vate corporate sector is undertakenusually as an expansion or a diversi-fication plan of an existing company;or by promoting a new company forthe new unit. Long-term finance (asdistinct from working capital) forthese industrial projects has to besought 'from outside or has to begenerated from internal sources. Inrecent years, companies have had to

rely more and more on internal sour-ces; primarily because they experiencea host of difficulties in securing theneeded funds from 'external' sources.These external sources are mainly,(i) equity capital (rights or initialissues), (ii) preference capital, (iii)

convertible debentures, or (iv) borro-wings (loan or debentures) from fin-ancial institutions (such as IDBI, IFC,ICICI, etc). Amounts collected fromprefercnce capital, or convertible de-bentures are small and inadequate.Therefore corporate managements facethe task of finding a correct mixtureof (i) equity, and (ii) borrowings (ordebt). With this, the problems begin.

D.ebt-Equity RatioIn principle, there would, of course,be something like one optimum debt:equity mix, for any given project, andthis optimum would depend on variousconsiderations. In practice, it is be-coming increasingly difficult to keepstrictly to this 'optimum', becaiuse forquite some years now, equity itself islosing its glamour, which it had inthe early sixties. Several factors, suchas the slack stock market, the setbackin corporate profitability, high interestrates on corporate and other deposits,etc, contributed to the decline of theequity cult. It is not necessary to dis-cuss these here. The point to reckonwith is that since we need many new

industrial projects to come up, andsince equity, which is one of the twochief souircesof finance (iz, debt andequity) is proving unpopular, the re-maining other source, viz. debt, willnaturally be called upon to share alarger burden at least until equity re-gains its attractions.At times this share may be in ex-cess of the one that is demanded bythe notional optimum debt-equitymix; but that cannot be helped. Un-fortunatelv, government's financial in-stitutions which are the monopolysuppliers of 'debt finance' are not al-ways willing to oblige and accommo-date. There is no such thing as an'optimum ratio' specified for differentindustries; government guildelines in1975 had laid down 2:1 as a fair anda reasonable ratio; but financial insti-tutions seem to have a wider spect-rum - say, 1.5:1 to 2.5:1 - in mind.The rationale behind this thinkingseems to be sonmethingas follows:The institutions would like the pro-moters to contribute at least 15 percent of the total project cost, all inthe form of equity. The promoters inturn are keen to have effective con-trol over management, and, in theirview, this is generally not possibleunless they hold at least 40 per centof the equity capital itself. If the pro-ject cost is say Rs 100 lakhs, reconci-ling these two considerations impliesthat the promoters must hold an equi-ty of Rs 15 lakhs; outsiders should

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