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Frank G. Wisner II, a former U.S. ambassador to India, says the return to power of a coalition government in India led by the Indian National Congress party may slow— but not alter— Indian economic reform and efforts to improve relations with Pakistan. But Wisner cautions that the new government, likely to be led by Sonia Gandhi, the Italian-born widow of Rajiv Gandhi, may not remain in power long. The reason: its thin margin of victory, which may soon lead to a series of new national elections in which Congress would again compete against the defeated incumbent, the Bharatiya Janata Party (BJP).

Wisner, who co-chaired a 2004 independent task force on South Asia sponsored by the Council on Foreign Relations and the Asia Society, is the vice chairman, external affairs, of American International Group, Inc. He was interviewed May 14, 2004, by Bernard Gwertzman, consulting editor for cfr.org.

Did the Indian election results surprise you as much as they surprised most of the American press?

Yes. I think everyone was taken aback. As the election, which took place over a three-week period, rolled out, exit polls increasingly began to point to the fact that there was going to be a smaller and smaller BJP coalition-favored outcome. But to see it end as it did took me by surprise, and it is an important outcome. Let me argue, however, that as we get into the numbers, I think there are some further surprises to emerge. For example, if I understand it correctly, both the Congress [Party] and the BJP lost popular votes over the preceding election. In other words, the Congress came down from about 28 percent to about 27 percent of the popular vote. What this means is that the regional parties have continued to gain strength.

Second, an increasingly important point is that the victory margins were so hair-thin that a reversal in the future is not inconceivable. I would argue that, given the structure of the coalition put together at the moment, the thinness of the election could very well result in another general election in a year’s time. As the mid-1990s show, you could go through a series of general elections, and I am not yet satisfied that we see a formula for a stable government coalition such as we’ve enjoyed for the past years of BJP rule.

BJP rule produced prosperity, at least in the middle class and above, and important moves toward rapprochement with Pakistan. Do you expect any drastic changes?

The instinct of the Congress-led coalition, particularly the leaders of the Congress Party, will be inclined towards stability. After all, the Congress Party launched the Indian economic reform in the early 1990s. On the reform front, and even on the Pakistan front and the China normalization front, Congress has a strong record, and it would want to stand by it. And the kinds of people who are likely to join what I assume will be a Sonia Gandhi-led government will be of that mind.

That said, I would make three points. The first is that it will take them a while to settle down, put the coalition together, and get traction and get on top of their brief, so there will be delays that one would have not wished to occur, particularly on the reform side.

Second, there is a leftward bias in this coalition. There are 50-some members of the Communist Party, one of the key parties in the coalition. Therefore, some of the more drastic reforms, particularly in the field of privatization and labor reform, will be harder to obtain— unless they surprise us all, and there are reasons they could surprise us. But for openers it will be tough, and they will have to work very hard to make those sorts of reforms happen.

The third is that if my assumption is correct and it will be a hard-to-manage coalition and you may be back in a general election, then you will have a period of uncertainty, which will affect all the accounts: the Pakistan peace account, the reform account, all the governance issues in India.

What particular reforms are we are talking about on the labor and economic fronts?

There are a whole lot of reforms that were foreseen, some tee-ed up and some further down the road that were waiting for the outcome of this election. The BJP had pretty much committed itself to some important legislation in the financial services area: making it possible for foreign insurance companies to own 49 percent of their assets and increasing foreign ownership levels in banking and in telecommunications. The BJP hoped to get to these reforms very quickly, maybe as early as summer and fall, and get them out of the way. This will now take longer, in my judgment. I think they can be achieved, but it will take a bit longer while the government settles down.

How much can foreign insurance companies own now?

They can only own 26 percent of the companies they are invested in. [Permitted levels of foreign investment in] banks and telecom companies would have gone up. Then the BJP hinted at restarting a very aggressive campaign of privatization of government-owned enterprises. They were headed in that direction. This would have produced money for investment in infrastructure and managing of the fiscal deficit. But frankly, with a left-biased government, getting privatization up and running is going to be tough.

Which industries in particular are we talking about?

The whole country.

I thought there was already a great deal of this.

Not very much, unfortunately. Major industries have just started down the privatization field. A very, very considerable portion of the Indian economy is in state hands. I would say about 90 percent of all energy is in state hands. And in labor laws, India still has the old-fashioned, “You can’t hire and fire.” You can’t fire, and it is, therefore, hard to hire.

Most recent mentions of India in the American media have been related to outsourcing U.S. jobs to high-tech centers like Bangalore, which is in a poor province in the south.

In my view, India has been in the news, fundamentally, for two reasons. One, overall, the economy has done very, very well. We have seen rates of growth in India in the last year that are record-breaking. GDP growth better than 7 percent last quarter, the highest rate of growth anywhere in the world. Broadly, across all sectors, the Indian economy has been doing very well, and they ought to maintain a very high rate of growth, assuming there’s even a halfway good monsoon [to aid agriculture production], and that’s reasonable to anticipate. The second is, yes you are right, the world has looked at it from the information-technology, high-tech vantage point, the outsourcing of the high-end of the lower-end of technology.

Bangalore, among many cities, has surged forward, along with Hyderabad, Bombay, Pune, and outside of New Delhi, in Gurgaon. But look what happened in the election. The incumbent state governments in Bangalore and Hyderabad— which was nicknamed “cyber-abad”--were thrown out of office. And that is because incumbency is traditionally its own enemy in India. The disparities of prosperity in the urban centers— where the information-technology industry was churning away— and the traditionally poor rural areas also played a major role. As a general matter in the election, BJP and its allies did well in the cities, and the Congress did well in the countryside, which remains poor.

It’s interesting that in India the poor people turn out to vote.

That’s all they have.

Let’s talk about foreign policy. Outgoing Prime Minister Atal Bihari Vajpayee had promoted ending tensions with Pakistan over Kashmir and nuclear weapons. Was he playing politics, or did he strongly believe in improving India-Pakistan relations?

Vajpayee felt very strongly. He felt that it was an opening that would happen only once in a lifetime. Before the end of his political life, he wanted to make real progress on the Pakistan front and set aside the quarrel that has plagued his entire generation in India. He felt that as a matter of principle.

Was it a popular policy?

Yes, and it had the support of all parties. I think the new government will follow the same policy, with the modest reservations that it has to get its feet on the ground and that it will take a while to prove that the coalition is stable. The direction should remain the same. This incoming group will want to continue the process with Pakistan. That means two things. First is that the confidence-building measures [Vajpayee had pursued]--the opening of trade routes, the opening of communications routes, the expansion of trade, the continuation of the cease-fire in Kashmir— in a quietly supportive way, continue creating better grounding for the second, which is substantive dialogue on the political issues, including Kashmir.

The United States has very few friends these days around the world. To a certain extent India supported U.S. anti-terror policy because, obviously, the Hindu government had tensions with Muslims.

India has been a victim of huge amounts of terror over the past few years. It has been waiting for us to recognize that it had a problem.

Do you expect any dramatic changes in this situation?

I do not. I think the reorientation of Indian foreign policy towards the United States into a stronger and better— not an uncritical— relationship, but a strong strategic reorientation, will not change. In fact, the beginnings of the reorientation towards Washington began in the last Congress government, when P.V.N. Rao was prime minister. I was ambassador [in 1994-1997], I was there. I believe that the kinds of people who are likely to be in the [new government’s] foreign policy/national security positions will not send India down different paths. Read Vajpayee’s outgoing remarks. It’s a beautiful statement. You won’t see the name “the United States” in it. You will see his peace efforts towards Pakistan and China mentioned. The Indians will not, be it a Congress- or a BJP-led government, go into a visible, open embrace with us. But they want a strategic relationship.