Gujarat, until recently India's most industrialized state and peopled by the country's most business-minded community, has been in shock since February. That month, bloody riots broke out after a train carrying Hindus was burned, and some 1,000 Muslims were butchered in retaliation. Taking advantage of the Hindu-dominated state's anti-Muslim mood, hard-line Chief Minister Narendra Modi called and has won elections after his party, the Bharatiya Janata Party (BJP), campaigned on a militant pro-Hindu platform.

UPBEAT FEELINGS. Leading the business group to Wapi, Sunil Parekh, a former director with a national industry association, was expecting to find economic jitters. Instead, he found a surprisingly upbeat region, which was looking forward to the implementation of Modi's promise for Gujarat's development. It includes supplying water to every village, creating 100,000 jobs, breaking India's rigid labor laws that provide virtual lifetime employment for workers, and reforming the power sector.

Parekh, who had lamented Gujarat's faltering economic growth and the rise of religious rivalries, or communalism, thinks his state could find itself back on track. "Modi won the vote on communalism -- but will consolidate his position on economics," he predicts.

Most of India is hoping that Parekh is right. Some view Modi's win on the promise of a Hindu state for Hindus as a dangerous turn away from the country's secular tradition toward extreme religious fundamentalism. Analysts say the rejection of Italian-born Sonia Gandhi, head of the opposition Congress Party, as a national leader, left Gujarati voters with only Modi's party, the BJP, as an alternative.

FATEFUL TIME. What's alarming many Indians now is that the BJP, which rules the country at the head of a rag-tag coalition of 26 regional parties, will attempt to replicate nationwide its hard-line stance in Gujarat. Elections are coming up in 10 other Indian states in 2003. National elections are due in 2004. The fear is that the BJP, emboldened by success in Gujarat, may call early elections in hopes of riding the wave of extremism to victory.

The ruling BJP is facing two choices: To rebuild religious harmony and go down in history as the party that made India an economic powerhouse or be remembered as the party that took India down the road to religious extremism, a parallel path followed by its despised rival and neighbor, Pakistan. The economy would be but one of many casualties along this path.

Not only are the BJP militants anti-Muslim but they're also perceived to be against economic reform -- despite their promises -- advocating an India run on a rather woolly headed concept of "nationalist economics." Already, speculation is brewing that Atal Bihari Vajpayee, India's liberal Prime Minister, will find himself isolated, along with his reformist colleagues, such as Privatization Minister Arun Shourie and Finance Minister Jaswant Singh.

CHASING CHINA. The pro-Hindu BJP came to power in 1999 promising economic progress, but its rising religious stridency has pushed reform off the front pages. What's worrying investors now is that politics, rather than reform will dominate in India, with scarce resources being allocated to politically attractive but unfeasible projects like a nationwide waterway and canal program while several hundred dams and roads across the country lie unfinished.

That's unfortunate. If anything, as China's growth rate booms, New Delhi needs to accelerate the reform program it initiated a decade ago. India's growth rate has slowed to 5%, from 7% in 1998, and it's sitting on a consolidated fiscal deficit that's 11% of gross domestic product.

Some businessmen say the BJP could surprise. The party has been hemmed in by the constraints of coalition politics, they say, and five years of uncontested rule in the important state of Gujarat could provide the party with the confidence to be bolder on reforms. That assurance, say the optimists, could even spill over to the capital.

GOLDEN OPPORTUNITY. Dilip Chenoy, director of the Confederation of Indian Industry, says the Gujarat win has "invigorated the BJP at the center, which will take reforms forward." The association, which had earlier condemned Modi's religious politics in Gujarat, is hoping that the state will "work vigorously to regain its preeminent position as one of the foremost destinations for investment in India."

The BJP has a golden chance in Gujarat: Its huge two-thirds majority in the state's legislature means it can push through its economic agenda. That could allow it to repair the domestic and international damage caused by February's riots. Foreign investors like British Gas, which has invested $500 million in oil and natural gas exploration and distribution in Gujarat and neighboring Mahrashtra, have stayed on despite the riots. Its 65%-owned Gujarat Gas Co. has seen business jump 80% since October, and Director Pravin Tandon says with election uncertainties over, the impact on its business will be "more positive."

British Gas, however, is one of the few foreign investors in Gujarat. Many companies that had pledged money to Gujarat before the riots have put their projects on hold. This year, Gujarat lost its position as the leader for investment in India. In October, the debt ratings on state projects were downgraded by Indian rating agency Crisil.

FORGOTTEN PROMISES. Certainly, the BJP's election promises are impressive, especially its bold stand loosening notoriously restrictive labor laws to make it easier to hire and fire labor in the state -- something no government in New Delhi has been able to pass in Parliament. In India, however, political parties hardly ever stick to their election promises, especially economic ones. Development and reform haven't won a single election in India so far, nor are they likely to in the upcoming state and national elections.

India's unique position as the world's largest democracy and home to one of the world's largest Muslim populations may be under threat. The aftermath of the BJP win in Gujarat will put Indian democracy and development to the test.


Full Story: http://www.businessweek.com/bwdaily/dnflash/dec2002/nf20021218_8017.htm

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