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TMCNet:  India risk: Political stability risk

[October 08, 2007]

India risk: Political stability risk

(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING


RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC51C50Political stability riskB30B30Note: E=most risky; 100=most risky.SUMMARY

The transfer of power from the Bharatiya Janata Party (BJP)-led coalition to the United Progressive Alliance (UPA), led by the Indian National Congress, proceeded smoothly following the Congress surprise election victory in May 2004. The government coalition fell short of a majority and is being supported in parliament by unreliable regional parties and the Left Front communist parties, although they have not joined the government. This has made the minority government somewhat unstable because of policy differences between Congress, regional parties and the leftists. Although the Congress party is once again back in power, the waning influence of dominant national parties and the rise of coalition governments has given regional parties stronger influence. This has led to a gradual, but significant, transfer of power from the centre to the states.


A general election is called early (High Risk)

In August 2007 parliament found itself deadlocked over the US-India nuclear co-operation agreement that was signed in July. Strongly opposed to the deal, the Left Front parties, which support the UPA government from outside the coalition, threatened to withdraw their support if the government went ahead with the deal's implementation. Although the UPA could continue to rule as a minority government if this happened, this turn of events has greatly increased the possibility that an early general election will be called (it is not due until May 2009). The need to pass the next budget, due to be presented in February 2008, could be the cut-off point for an early election. If an election were to be called early, opinion polls suggest that Congress could win at the expense of the BJP. (The BJP has been in disarray since it lost power at the national level three years ago, and in recent months it has been riven by internal disagreements.) On the other hand, coalition formed of left-wing and regional parties is also a possible outcome. Any coalition government would, however, be beset by a number of contradictions, ranging from personality clashes to divergent approaches to economic policy. Businesses should expect an unsettled political environment and avoid being too closely linked to any political party.

The shift in power from the centre to the states and political under-representation of the northern states has a destabilising effect (Moderate Risk)

States are increasingly formulating their own economic policies, as the government allows some states--particularly in the south and west--to introduce reforms faster than the central government. Other states are maintaining a more dirigiste approach. In the longer term, if economic growth rates in Indian states continue to diverge, there is a risk that economic differences will provoke political differences, and poorer states may exert their political muscle to ensure a reallocation of resources. Since 1977 representation in parliament has been frozen on the basis of the results of the 1971 census. Given that population growth is much higher in the northern states, the relative value of votes cast in the north in terms of political representation has fallen. The National Population Council has recommended an extension of the "freeze" on representation until 2026. This is likely to become a source of major tension between the country's northern and southern states. Companies should choose their locations carefully and be aware of the major differences that exist between states.

Insurgency in the North-east spirals out of control (Low Risk)

The Congress-led government faces increasing criticism over its handling of the insurgency in the volatile and ethnically diverse north-eastern states. There are many secessionist movements in the region. One of them, the United Liberation Front of Asom (ULFA), wants independence for the state of Assam. Another secessionist outfit, the National Democratic Front of Bodoland, is seeking the creation of a state for the Bodo people within the state of Assam. In the state of Manipur, another of India's north eastern "seven sister" states, the government is facing charges of mishandling alleged human-rights abuses by the Indian army. The violence is likely to remain limited to the north-east of India, but it has worsened in recent months and a further deterioration of the situation could damage the government's reputation.


(Updated: September 25th, 2007)

Political Forces

Congress led the campaign for independence and has remained a powerful force in Indian politics, transcending religious, ethnic and caste divisions. However, it is also a party tightly focused on its heritage: members of the Nehru-Gandhi family have led the party throughout most of its history. India's first prime minister, Jawaharlal Nehru, was succeeded by Lal Bahadur Shastri, who died within a year of taking office. The party then turned to Nehru's daughter, Indira Gandhi, who remained leader until her assassination in 1984, after which her son Rajiv took over as party leader. He was assassinated in 1991, and Congress is now led by his widow, Sonia. The decline of Congress began when Indira Gandhi declared a state of emergency. Her opponents combined to form the Janata Party, which won the 1977 election. In 1980 Mrs Gandhi brought down the Janata government and returned to power. Rajiv Ghandi came to power in 1984 with the largest majority ever and the aim of liberalising and modernising government, but he was soon mired in a corruption scandal and lost the 1989 election. He managed to split and finally bring down the Janata Dal government that followed him, but he was killed before the 1991 general election. Although falling just short of a majority, Congress formed a government, and after the election carried out considerable economic liberalisation in an attempt to solve the country's balance-of-payments crisis. That did not, however, save it from defeat in the 1996 election.

As repeated efforts to form a national alternative failed, the electorate turned to regional and caste-based parties. Following Congress's poor performance in the 1998 general election, Rajiv Gandhi's Italian-born widow, Sonia, gave in to repeated requests and took over as party leader. However, her foreign birth has prompted criticism in parts of Congress as well as from the BJP. Following Congress's surprise victory in the 2004 general election, Mrs Gandhi declined to take up the post of prime minister, instead nominating Manmohan Singh. But Mrs Gandhi remained the leader of Congress, and until March 2006 chair of the National Advisory Councila post she had to relinquish on technical grounds, which also led to her resignation as member of parliament in early 2006. However, in May 2006 she was re-elected with a landslide victory in the Nehru-Gandhi stronghold constituency of Rae Bareilly in Uttar Pradesh. Most commentators believe that the centre of power within the government lies with Mrs Gandhi rather than MrSingh.

The stability of the current Congress-led minority government depends crucially on how readily the Left Front parties withdraw their support in case of disagreement over policy. They boycotted the co-ordination committee, in which the Left Parties agree policy with the UPA, for four months in 2005 and eventually got their way, scuppering the economic reforms the government sought to implement. The Left Front has an effective veto over any reform that requires a vote in parliament. Following the communist parties' landslide wins in state elections in West Bengal and Kerala in the first half of 2006, they became more assertive at the national level. The Left Front has already stymied several important reforms, notably labour market reform and privatisation. Given that it has two years of its five-year term still to run, the government will need to tread a fine line between its reform ambitions and policy compromises with its political allies. While the government will try to distribute the benefits of economic growth more widely, its overriding objective will be to ensure the continuation of India's economic boom.

Equally important, however, are divisions within Congress that could result in government instability. Loyalties in the Council of Ministers are likely to be split between MrSingh and Mrs Gandhi. MrsGandhi will have to reconcile the demands of individual members of the government as well as interest groups within the diverse Congress party to secure a stable government. Congress's success in the 2004 general election is evidence that the dynastic claim still exerts considerable force, particularly in rural areas. Mrs Gandhi's son, Rahul, is being groomed to play a prominent role in the party, but his performance in the state election in Uttar Pradesh in April-May 2007 was disappointing. Mrs Gandhi's daughter, Priyanka, is considered more charismatic than her brother, but she has avoided the political spotlight so far.

The Bharatiya Janata Party (BJP) traces its roots back to the Bharatiya Jan Sangh, a party representing traditional Hindu values and the interests of small businesses, traders and the middle class. It is the political wing of a group of interconnected cultural and religious movementsthe Sangh Parivarof which the most politically significant is the Rashtriya Swayamsevak Sangh (RSS), a disciplined cadre organisation that counts the president of the BJP, Rajnath Singh, and the party's senior leaders, Lal Krishna Advani and Atal Behari Vajpayee, among its former members. A member of the RSS assassinated Mahatma Gandhi, and the group is seen by its critics as sinister and anti-Muslim.

The BJP emerged as a significant force in the 1989 general election, winning 88 seats. A central campaign issue was the demand that a Hindu temple be constructed on the site of the Babri mosque in Ayodhya in Uttar Pradeshwhich many Hindus believe was built upon the site of a temple marking the birthplace of the Hindu god-king Ram. In the 1991 election the BJP established itself as the main national opposition and won power in four states. In December 1992 Sangh Parivar activists demolished the Babri mosque, triggering communal riots that left thousands dead. In the 1993 state elections the BJP suffered setbacks and won control of just one state, but in the 1996 general election it won 160 seats in the LokSabha.

In May 1996 the BJP formed its first national government, led by MrVajpayee, which lasted just 13 days. The BJP re-emerged as the power broker in 1998, when it won 182 seats in the general election and cobbled together a coalition of 13 parties under MrVajpayee's leadership. The coalition proved unwieldy, collapsing in April 1999. However, MrVajpayee proved himself able to rally parties of disparate political persuasions to form a government. Another election in September-October 1999 returned a BJP-led coalition of 20 partners to power. Members of the new coalition, the National Democratic Alliance, campaigned under a common platform and won 302 seats. Despite the increased majority, however, the range of parties involved in government left the alliance vulnerable to the whims of smaller regional parties.

MrVajpayee sought to rein in the party's more extreme Hindu-nationalist members, particularly in relation to questions of economic reform. But the party's reformist credentials proved increasingly shaky in the face of conflicting demands from coalition members and resistance from the BJP's nationalist wing. The close relations the party cultivated with leading industrialists also resulted in increased protection for some industries from foreign competition. On the foreign policy front, MrVajpayee sought improved relations with neighbouring Pakistan and paved the way for further confidence-building measures implemented by the UPA government.

Since the electoral defeat in May 2004, the BJP has been in disarray. Following a further electoral defeat in October of that year in the politically important state of Maharashtra, the party appointed Lal Krishna Advani, one of the founders of the BJP and previously MrVajpayee's right-hand man, as party president. The BJP's identity crisis worsened in June 2005, when MrAdvani offered to stand down as party president after an official visit to Pakistan, during which he described Pakistan's founder, Mohammed Ali Jinnah, as a "secular" leader. The comments, possibly made by MrAdvani in an attempt to shed his image as a hardliner and to move the party more towards the mainstream, divided the BJP down the middle and outraged Hindu-nationalist organisations close to the BJPone of the cardinal tenets of modern Indian history is that MrJinnah was the non-secular architect of the two-nation theory (an India for Hindus and a Pakistan for Muslims).

Eventually, a considerably weakened MrAdvani was forced to resign at the end of 2005. His successor is the less controversial Rajnath Singh, who is seen as a skilful grass-roots organiser and effective administrator, but his appointment has only temporarily suspended a divisive succession battle. Few of the younger generation of BJP leaders, such as Arun Jaitley, have the mass base enjoyed by MrAdvani or MrVajpayee. An exception on the Hindu right is the chief minister of Gujarat, Narendra Modi, who commands grass-roots support in right-wing Gujarat, but few see him as a potential national election-winner (as he remains too far to the right). The outcome of the struggle is likely to determine whether the BJP will go back to its traditional values of Hindu nationalism or evolve into a more moderate force in Indian politics.

The Communist Party of India (CPI) emerged from Congress, splitting from the Indian National Congress during the second world war. The CPI itself later split to form a Marxist group, the Communist Party of India (Marxist) or CPI (M). The CPI (M) is strongest in West Bengal, where it has been in power for 27 years, and it has frequently held power in Kerala and Tripura. Although the "third force" includes several powerful regional parties that are increasingly important in a fractured political scene, these parties have no strong ideological commitment to a common agenda. Instead, they are motivated by state or caste interests that can often be better served through alliances with the BJP or Congress. After the May 2004 general election the Left Front group of communist parties decided not to join the Congress-led UPA government formally, but to support it from "the outside". The communists strongly oppose the deregulation of the labour market and privatisation, but have at times been more pragmatic on other policy issues, such as foreign investment.

Main political figures

Manmohan Singh: Prime minister. MrSingh has held many important positions in the economic and civil service hierarchy, including governor of the Reserve Bank of India (the central bank) and deputy chairman of the Planning Commission. An Oxford-educated economist, MrSingh is widely respected across political parties and has a reputation of being a pragmatist. Throughout his political life he has been an appointeehe has never won a seat in India's lower house of parliament, the Lok Sabha.

Sonia Gandhi: Indian National Congress party leader in parliament, and Congress party president. Mrs Gandhi is the Italian-born widow of a former prime minister, Rajiv Gandhi. She led Congress to success in the 2004 general election but declined the offered post of prime minister. This move enhanced her moral stature in a culture with a long history of renunciation. In March 2006 MrsGandhi resigned as member of parliament and chair of the National Advisory Council, an "office of profit" she was not supposed to hold under Indian law to avoid a conflict of interests. She was re-elected with an overwhelming majority from her constituency, Rae Bareilly in Uttar Pradesh, in May 2006.

P Chidambaram: Finance minister. MrChidambaram is a suave, articulate politician from the southern Indian state of Tamil Nadu. He is well-known for his pro-market reforms, particularly tax reform and budgetary discipline, during his tenure as finance minister in 1996-98. A Harvard-educated lawyer and a strong supporter of the World Trade Organisation, MrChidambaram is popular in business circles.

Rahul and Priyanka Gandhi: Mrs Gandhi's children and heirs to the Nehru-Gandhi dynasty. In the 2004 election campaign Rahul and his sister Priyanka emerged as the Congress's star campaigners, emphasising the fact that the century-old Gandhi-Nehru dynasty remains India's most powerful and charismatic political family. Rahul was elected to the lower house of parliament for the first time and is being groomed to play a prominent role in Congress, but his political performance has been mixed.

Pranab Mukherjee: Foreign minister (from May 2004-October 2006, defence minister). A prominent Gandhi family loyalist, MrMukherjee held at least half a dozen important ministries in past Congress governments, including finance and external affairs. He has close links with the left.

Laloo Prasad Yadav: Railway minister. He formed the Rashtriya Janata Dal (RJD) in 1997, after breaking away from the Janata Dal party. His party is a key ally of Congress in the United Progressive Alliance (UPA) government. After almost two decades of dominating politics in Bihar his party lost power in the state in 2005.

Rajnath Singh: President of the opposition Bharatiya Janata Party (BJP) since the start of 2006. MrSingh held various important posts in his political career, including chief minister of Uttar Pradesh and minister of agriculture in the Vajpayee government. He is an effective administrator and grassroots organiser, but has the reputation of being uncharismatic.

Lal Krishna Advani: A senior figure in the BJP, MrAdvani is credited with making the party a major political force since 1984, when it held only two parliamentary seats. He resigned as party president in December 2005, but remains the leader of the opposition in the Lok Sabha.

Atal Behari Vajpayee: Former prime minister and former foreign minister (in a left-right anti-Indira Gandhi coalition in the late 1970s), MrVajpayee has had a distinguished parliamentary career. Following the BJP's defeat in the May 2004 general election he became the party's chairman, a newly created and largely symbolic position, and has been acting as an elder statesman guiding the party.

Mayawati: Chief minister of Uttar Pradesh and president of the Bahujan Samaj Party. Uttar Pradesh accounts for about one-sixth of all seats in the Lok Sabha, making Mayawati a potential major player at the federal level if her party can repeat the overwhelming electoral success it displayed in May 2007 at the state level in national parliamentary elections that are due to be held by May 2009.

Somnath Chatterjee: Speaker of the Lok Sabha. A veteran Marxist leader, MrChatterjee is the first communist leader to occupy this position. A member of parliament for the tenth time, MrChatterjee has established a rapport with politicians across party lines.

Abdul Kalam: President of India. A former scientist and founding father of India's nuclear-missile programme, Mr Kalam is widely respected. He was elected president by an overwhelming majority in July 2002. His term expires in July 2007.

Political Developments

The BJP government in 1998 gave the go-ahead for the testing of nuclear bombsa reflection of the party's determination to raise India's profile as an aspiring world powereven at the cost of economic sanctions. Economically, the BJP remained pragmatic during its time in government and pursued reformist policies. Politically, the BJP had to abandon some of the party's policy cornerstones, including the building of a Hindu temple on the site of the Ayodhya mosque and abolishing India's separate civil code for India's Muslims to get the support of secular parties. MrVajpayee's popularity and integrity did much to move the party towards the political mainstream and put pragmatism overideology. Consistent with this attempt to reinvent the essentially still Hindu-nationalist party, the BJP government toned down its hardline Hindu-nationalist rhetoric in a bid to appeal to more mainstream voters as the 2004 general election approached. It presented itself both as a party that delivered economic prosperity and as a steward of a strong India with a presence on the global stage. The BJP promoted its "India Shining" campaign, which aimed to capitalise on a buoyant economypartly the result of its economic reforms, but also of good fortune. In contrast, the opposition Congress party presented itself as the defender of India's inclusive, secular heritage. It tried to appeal to voters across castes and religions, as well as to the poor, who had not seen the fruits of economic reform.

Composition of the Lok Sabha(a), Jun 2004United Progressive Alliance (governing coalition)222Indian National Congress145Rashtriya Janata Dal24Dravida Munnetra Kazhagam16Nationalist Congress Party9Pattali Makkal Katchi6Telangana Rashtra Samithi5Jharkhand Mukti Morcha5Marumalarchi DMK4Lok Jan Shakti Party4Others4Left Front (supporting the governing coalition)59Communist Party (Marxist)43Communist Party of India10Others6National Democratic Alliance (opposition)186Bharatiya Janata Party (BJP)138Shiv Sena12Biju Janata Dal11Shiromani Akali Dal8Janata Dal (United)8Telugu Desam Party5All India Trinamool Congress2Nagaland People's Front1Mizo National Front1Other parties76Samajwadi Party36Bahujan Samaj Party19Other parties 13Independents8Total(b)545(a )The lower house of parliament. (b) Including two representatives of Anglo-Indians appointed by the president. The "India Shining" campaign backfired, with poor rural voters denied any new-found prosperity, and in a surprise victory a Congress-led coalition, the UPA, was narrowly elected to power in the May 2004 general electionthe Congress party (on its own) won only eight seats more than the BJP. However, the UPA fell short of a majority and is being supported in parliament by the Left Front group of communist parties, although these parties have chosen not to join the government and are supporting it "from outside". The minority government is led by Manmohan Singh, who was sworn in as prime minister following the refusal of the Congress leader, Sonia Gandhi, to take up the post. Mrs Gandhi remains the Congress party president and is the Congress leader in parliament. MrSingh, who has held many important positions in the economic and civil service hierarchy in India, is a respected economist and a pragmatist and is highly regarded across the political spectrum. In his first three years in government he has managed to hold together an unwieldy coalition and has pursued a gradualist economic reform agenda. On the foreign policy front, MrSingh, a Sikh born in the Pakistani portion of Punjab province, has continued a policy of rapprochement with Pakistan and has pushed India's bid for a permanent seat on the reformed UN SecurityCouncil. The cornerstone of his foreign policy, however, has been a strategic alliance with the US. A proposed nuclear deal with the US (it was still pending approval as of June 2007) has changed US-Indo relations and is likely to make India a vital US military and economic ally in coming years.

The opposition BJP has been plagued by internal tensions and in-fighting since it fell from power and is therefore unlikely to pose a substantial threat to the UPA government. A major Islamic terrorist attack or sectarian violence could, however, galvanise its traditional Hindu constituency. At the end of 2005 Lal Krishna Advani was forced to step down as party president, because of ideological differences with the Rashtriya Swayamsevak Sangh (RSS), the party's powerful parent organisation. Under a new president, Rajnath Singh, seen by many as an interim leader, the debate over the party's ideology has continued. The outcome of what could be a long-drawn-out leadership strugglewill determine whether the BJP will go back to its traditional values of Hindu nationalism, or whether it will evolve into a more moderate force in Indian politics.

The government faces no immediate threat to its survival and looks on course to last a full five-year term until 2009. However, it is severely hampered in its ability to formulate and implement policy. Politics remains centred more on tensions within the UPA coalition and between the UPA and its notional allies, than on competition from the BJP. The main tension is between the reformist economic liberalism of several leading Congress figures, notably MrSingh and the finance minister, P Chidambaram, and the leftist populism of many government supporters. These include members of Congress and of its coalition partners, and in particular the communist parties, which are not in the UPA but which lend parliamentary support to it. Curiously, the largest, the Communist Party of India (Marxist), or CPI (M), has come to resemble the official opposition. It has stood in the way of economic liberalisationranging from opening up Indias vast retail sector to fast-tracking industrial development through the creation of special economic zones. The party's strategy appears to be to use the leverage it now enjoys to expand its influence beyond those states where it is already a major forceWest Bengal, Tripura and Keralato the rest of India. To do this, it is relying on its supporters in the trade unions. This means that it has tried to block any reform seen as damaging to the interests of the workforce in the "organised" sectora definition covering workplaces with more than ten employees. There are about 30m such workers out of a total labour force of more than 400m, but they have become disproportionately powerful.

Important recent events

November 2003: India matches Pakistan's offer of a ceasefire along the Line of Control in Kashmir. Pakistan's unilateral offer followed measures announced unexpectedly by the Indian government in October to improve ties with its neighbour.

January 2004: A groundbreaking meeting is held between the Indian government and moderate Kashmiri separatists, marking a new chapter in the 14-year stand-off between the Indian government and the separatists.

February 2004: Formal peace talks over the disputed region of Kashmir are held in the Pakistani capital, Islamabad.

May 2004: A general election brings the Congress-led United Progressive Alliance (UPA) to power. Sonia Gandhi, the Congress leader, refuses to become prime minister. The post goes to Manmohan Singh, a former finance minister and reformer.

December 2004: Thousands die in the Asian tsunami; the Andaman and Nicobar Islands are devastated.

July 2005: Islamist militants attack a holy site in Ayodhyathe flash-point of Hindu-Muslim strife in 1992raising concerns over possible renewed inter-community violence in India and a stalling of improving relations between India and Pakistan.

October 2005: Three bombs in a crowded marketplaces in Delhi kill 62 people and injure over 200. A little-known Kashmiri group claims responsibility for the attack.

February 2006: India's largest-ever rural jobs scheme is launched with the aim of lifting around 60m families out of poverty.

May 2006: Congress performs poorly in four important state elections in Assam, Kerala, Tamil Nadu and West Bengal. The communists, on whose support the UPA relies, win convincingly in West Bengal and Kerala.

July 2006: Several bombs target Mumbai's commuter train system, killing over 200 people. Pakistan's president condemns the attack, and the Indo-Pakistani peace process continues.

December 2006: US President George W Bush approves a controversial law that would allow India to buy US nuclear reactors and fuel for the first time in 30 years, subject to congressional approval.

February 2007: Bomb blasts on the Friendship Express, a train travelling from New Delhi to the Pakistani city of Lahore, kill 68 people, most of them Pakistanis.

India and Pakistan sign an agreement aimed at reducing the risk of accidental nuclear war.

May 2007: The big parties--Congress and the BJP--fare poorly in the important state election in Uttar Pradesh. A regional caste-based party, the Bahujan Samaj Party, wins a majority and displaces the Samajwadi Party, an ally of Congress at the federal level.

International Relations and Defence

India became independent in 1947 at the start of the cold war. MrNehru had visited the Soviet Union in the 1930s and felt that it provided the best economic model for India's development. Consequently, India did not join the Western alliance, and instead followed a policy of neutrality between the two blocs. Pakistan, meanwhile, joined the US-led South-East Asian Treaty Organisation. India's defeat by China in a short war in 1962 brought the US and India briefly closer, but as Indian relations with Pakistan deteriorated, US sympathy for India waned. In 1971, when Hindu refugees from East Pakistan flooded into India, India decided to attack Pakistan, and to ward off the US, entered into a treaty with the Soviet Union. The treaty provided India with low-cost security for the next 18 years.

Since the collapse of the Soviet Union India has built closer relations with the US and the West. Its liberal reforms in the early 1990s also made it more receptive to foreign trade and investment and led Western countries to take a greater interest in India. The 1998 nuclear tests caused a glitch in the process, but it has continued nevertheless, boosted in recent years by Indias booming economy. Indian-US relations entered a new era in 2005, when the two countries agreed to deepen their co-operation in the area of defence, including joint weapons production, greater technology sharing, and increased trade in arms. In March 2006 the US president, George W Bush, visited India and signed a landmark deal that welcomed India into the club of states that the US permits to possess nuclear weapons. The proposed deal changes the world's nuclear order by amending the Nuclear Non-Proliferation Treaty (NPT). However, the deal had not been finalised as of June 2007; it faces opposition in India, where critics say it would compromise Indias nuclear independence, including its right to test nuclear weapons and reprocess spent fuel. Meanwhile, in the US (and elsewhere), critics warn of the potentially disastrous consequences of the US-India deal for reining in other nuclear-weapons seeking countries, especially Iran. Under the proposed agreement the US offers India "full civil nuclear energy co-operation and trade", thereby ending sanctions that were imposed on the basis of India's refusal to sign the NPT. (Since 1968 it has been a tenet of US foreign policy that only countries that sign the NPT are permitted access to US nuclear technology.)

Since independence, India has fought three wars with Pakistan and one with China. Disputes with Pakistan have been mainly territorial. In 1947 Pakistani tribesmen invaded the mainly Muslim princely state of Jammu and Kashmir, and Indian forces intervened at the request of the state's Hindu maharaja. The resulting war left about one-third of Kashmir with Pakistan and the remainder with India (in 1963 Pakistan ceded some of the territory it controlled to China). Kashmir remains the subject of bitter dispute between the two countries. A short war was fought in 1965 over a Pakistani incursion into disputed territory in Kutch. Another war was fought over the exodus of Hindu refugees from East Pakistan in 1971; it ended with the separation of East and West Pakistan, and the creation of Bangladesh.

The victory of the BJP-led coalition at the general election in 1998 produced a notable cooling in relations with Pakistan, compounded by both countries' nuclear tests in May that year. Talks between the two sides resumed in October 1998, culminating in the so-called bus diplomacy that saw Mr Vajpayee journey across the border for talks with his Pakistani counterpart, Nawaz Sharif, the following year. However, any thaw was quickly undone when Pakistani-backed insurgents crossed the Line of Control (LoC) dividing Indian and Pakistani positions in Kashmir, capturing several high-altitude Indian border posts in the Kargil sector in May 1999. During two months of intense fighting each side lost hundreds of men, and the conflict threatened to escalate into all-out war. The crisis was resolved in July, when the Pakistani government agreed to withdraw the intruders. Three months later the commander-in-chief of the Pakistani army, General Pervez Musharraf, staged a coup and removed Mr Sharif's elected government.

After the September 11th 2001 terrorist attacks in the US, General Musharraf supported US action against the Taliban in Afghanistan and subsequently banned some terrorist organisations operating from Pakistan. After an attack on its parliament in December 2001, India identified the attackers and their handler as Pakistanis. India reduced diplomatic representation in Pakistan, suspended bus, train and air services, and stopped Pakistani overflights. The number of terrorist attacks in Jammu and Kashmir increased in the next six months, and in early 2002 both countries moved troops to the border. In October 2002, however, the People's Democratic Party (PDP) was elected to government in Jammu and Kashmir, forming an administration with the support of Congress. The PDP is committed to reconciliation, and at the invitation of the new chief minister, Mufti Mohammad Sayeed, MrVajpayee addressed a public meeting in Srinagar in April 2003, when he "extended the hand of friendship" to Pakistan.

In November 2003 India matched Pakistan's unilateral offer of a ceasefire along the LoC in Kashmir. The offer followed measures announced unexpectedly by the Indian government to improve ties with its neighbour a month earlier. A ground-breaking meeting was held between the Indian government and moderate Kashmir separatists in December 2003, marking a new chapter in the 14-year stand-off between the Indian government and Kashmiri separatists. In February 2004 formal peace talks over the disputed region of Kashmir were held in the Pakistani capital, Islamabad.

The rapprochement between the two nuclear neighbours has continued under the new Congress-led government since May 2004. India began a partial troop withdrawal from Kashmir in November 2004. In January 2005 India and Pakistan agreed to the single most important confidence-building measure in the last 50 yearsa bus route that links Indian- and Pakistani-controlled Kashmir. In January 2006 General Musharraf called for the demilitarisation of three cities in Indian-controlled Kashmir and the establishment of "self-governance" in both Indian- and Pakistani-controlled Kashmir. He suggested that self-governance should involve bringing both sides of the disputed Kashmir region under the joint control of India, Pakistan and the Kashmiris themselves.

Neither India nor Pakistan will agree to the other country ruling the whole of Kashmir or to full independence for the territory. India rejects the redrawing of the Line of Control, the de facto international border. The latest proposal by General Musharraf of "self-governance"however vaguewould work, at least in principle, without violating either country's conditions. But even if India wanted to explore this path, it would also have to be acceptable to the various Kashmiri groups.

There have been few tangible results in the peace process since the July 2006 bomb attacks on Mumbais commuter train network, in which nearly 200 people were killed. India blamed Pakistans Inter-Services Intelligence Directorate of planning the blasts. Pakistan vehemently denied any involvement and the allegation was never proved. Talks between the two countries resumed after several months, but a bomb attack on the crossborder Friendship Express train in February 2007, in which 68 people, mostly Pakistanis, were killed, threatened to derail the process again. The fact that this most recent terrorist attack did not cause a suspension of talks is a positive sign, but no real resolution to the decades-long dispute is in sight. Moreover, further negotiations could prove difficult given General Musharraf's increasingly tenuous hold on power in Pakistan.

India's relations with China are delicate. In 1957 India discovered that China had built a road across what it regarded as the north-east corner of Kashmir. China rejected India's territorial claims, and a series of violent clashes between border guards took place over the next five years. In 1962, after a particularly bloody clash,Nehru ordered the army to expel the Chinese. The Chinese army dealt India a crushing defeat, but then declared a ceasefire. The defeat has made India circumspect.

The Sino-Indian border has been quiet for over 40 years. In the 1980s the two countries began talks to demarcate their frontier, but progress has been very slow. In 2005, when the Chinese prime minister, Wen Jiabao, visited New Delhi, China formally abandoned its claim to Sikkim (whose accession to India in 1975 China had previously refused to recognise officially) and pledged to support a larger role for India in the international arena.

Territorial disputes are still at the heart of bilateral difficulties. China still claims Indias most north-easterly state, Arunachal Pradesh, as its own. India, meanwhile, claims Aksai Chin, a region located at the intersection of China, Pakistan and India and administered by China. But in Chinas eyes the gravest threat posed by India relates to Tibet, which could drift towards India in the event of internal disarray in China. India harbours the former leader of Tibet, the Dalai Lama, and about 100,000 Tibetans. Although Hu Jintao, China's premier, visited India in November 2006, his visit to Pakistan immediately afterwards served as a reminder that China continues to pursue a balance-of-power approach in the region.

In recent years Sino-Indian relations have increasingly been driven by economics. Bilateral trade between India and China has increased more than tenfold since the early 1990s. In June 2006 India and China agreed to re-open the trade route through the Nathu La that connects Sikkim and Tibet, which had been closed for trade since the 1962 conflict. During Mr Hu's visit to India both countries agreed to build on areas of common interest and avoid confrontation in areas of potential conflict. Thirteen agreements were concluded during the visit, including a pledge to double bilateral trade to US$40bn by 2010.

The 1971 India-Pakistan war ended with the surrender of Pakistan's entire army in the east and the establishment of Bangladesh as an independent state. Relations between India and Bangladesh are nevertheless close, if not particularly friendly. Various issues between the two countries remain unresolved, including Bangladeshi immigration into India, the sale of natural gas to India, water-sharing of the many common rivers, and Bangladesh's alleged role in harbouring Indian insurgents. India has completed the construction of over two-thirds of an iron fence along the 2,500-mile border with Bangladesh. The Bangladeshi political scene is polarised between the heirs of those who fought for independence from Pakistan on one hand, and the pan-Islamists, with whom last democratically elected government had close ties, on the other. Since the suspension of elections and declaration of a state of emergency in Bangladesh in January 2007, India has sought closer co-operation with its eastern neighbour in an effort to stabilise the political situation and facilitate a return to democracy.

India conducted its first atomic test in 1974, after which Pakistan embarked on its own nuclear programme. By 1994 it was widely accepted that Pakistan had acquired both the atom bomb and Chinese-supplied ballistic missiles. India has developed its own intermediate-range ballistic missile capability. In 1998 India tested nuclear devices, and Pakistan followed suit. The US president at the time, Bill Clinton, tried to persuade India to sign the NPT and the Comprehensive Test Ban Treaty (CTBT). However, India's political establishment, which regards the two treaties as "nuclear apartheid", refused to sign them as a matter of principle. The US came to accept that it was highly unlikely that India would ever sign the treaties. In 2005, in an effort to upgrade ties with India, the US changed its stance on the entire issue by stating that "as a responsible state with advanced nuclear technology, India should acquire the same benefits and advantages as other such states" and offered India sensitive civil nuclear technology. It thereby accepted India de facto as a nuclear power. The deal had not yet been finalised as of June 2007, however.

India maintains the second-largest army in the world, with total armed forces of 1.3m active servicemen and a further 1.2m reservists. However, its soldiers are poorly equipped, particularly for the demanding conditions in Kashmir. The army has a strictly non-political role, although it is often called upon to help beleaguered police forces in areas facing secessionist movements, such as Kashmir and the north-east. Defence expenditure is budgeted at US$20bn in fiscal year 2007/08 (April-March), or about 2.5% of GDP, and given the historically tense relations with Pakistan, it is likely to remain high.

Military forces, 2006/07IndiaPakistanChinaArmyPersonnel1,100,000550,0001,600,000aMain battle tanks3,9782,4617,580NavyPersonnel55,00024,000255,000aFrigates24648Submarines1685
8Air forcePersonnel161,00045,000400,000( )Combat aircraft8493522,643(a )Estimate.Source: International Institute for Strategic Studies, The Military Balance 2007.

Copyright 2007 Economist Intelligence Unit

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