India and the Super Powers: Deviation or Continuity in Foreign Policy?

Author(s): Baldev Raj Nayar Source: Economic and Political Weekly, Vol. 12, No. 30 (Jul. 23, 1977), pp. 1185-1189 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4365798 . Accessed: 18/03/2011 04:05
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SPECIALARTICLES

India

and

the

Super

Powers

Deviation or Continuity in Foreign Policy?

Baldev Raj Nayar The drastic political change in India after the March Lok Sabha elections could not be without a major impact on foreign policy. However, the euphoria about foreign policy shifts following the change of government requiresa slightly more critical examination.A little historicalperspective will show that the initial statements of the new government mark not sb much a departureas a new stage in an evolutionarydevelopmentinitiated by the Congressgovernment.
OVER the years, as a result of a clash of roles between the United States as a superpower and India as a middle power, a structure of alignment had developed by the mid-70s whereChina, by the US was linked with Pakistan and Iran, while India was linked with the Soviet Union. 1 Although surface appearances are often deceptive, this structure of alignment seemed to have acquired a frozen quality, with the different partners apparently locked into somewhat rigid positions. Then in mid-March 1977 a momentous event occurred in India, resulting in a massive defeat for Prime Minister Indira Gandhi and the ruling Congress party by the Janata party consisting of a leadership that she had put in jail prior to the elections. There was great exultation in the American administration at this major act of political surgery in India, and a keen expectation that the new government would seek better relations with the United States. The US had already received strong signals in the latter development. regard to Even before the elections were completed, Morarji Desai told an American correspondent - who described Desai as one "who strongly opposes that as Prime MinisCommunism" ter he would immediately make a policy declaration that would gladden India's friends in the West, announcing a return to true non-alignment, and that he would not let the IndoSoviet treaty stand in the way of equal friendship with any other power.2 Two days later, on March 22, 1977, after the overwhelming defeat of the Congress party had become clear, the New York Times editorialised: Of partigular importance to the United States is the expected shift in foreign policy. The attitude of the Congress party, which has ruled since independence,, has varied from China and India would probably a self-righteous edginess toward the work to limit Soviet influence in West to a chilliness bordering on hostility. All indications from the - Indochina... All these possibilities represent something of a windfall victorious alliance, known as Janata, for Washington.6 are that a friendly attitude can be expected toward the United States, with a noticeable cooling of feelings For the obvious discomfiture caused for the Soviet Union. Whatever its to the Soviet Union and the prospect foreign policy, India has begun to of Indian alienation from the Soviet earn a new claim on American Union, China too greeted fulsomely sympathies, and perhaps aid. the defeat of Indira Gandhi and her True to his word, at the press confer- government. ence soon after being sworn in as Prime Obviously, a drastic political change Minister, Desai declared in an appar- in India, after what many Indians have ent major foreign policy shift, "We referredcto as 'the dark night' and 'a do not have any special relations with traumatic experience', could not be any country". India, he said, would without a major impact on policy. be "properly non-aligned", pursuing Often, merely change in personnel refriendship with all countries on the sults in policy shifts even as commitbasis of reciprocity and not letting ment is expressed for older postures. the Indo-Soviet treaty come in the However, the euphoria about foreign way; he then stated somewhat provo- policy shifts following the change in catively, "It is left to Russia to do government in India requires a slightwhatever they want".3 ly more critical examination. A little declaration, the New historical perspective would demonsAfter this York Times reported that "the im- trate that the initial statements of plied Indian loosening of ties to the Prime Minister Desai did not mark a Soviet Union can also only be satis- new departure but rather a new stage US ad- in an evolutionary development initiatfying to Washington". The ministration also "noted with inter- ed by Indira Gandhi and her governest" Desai's statement on abstinence ment. from nuclear weapons, "suggesting a India had deepened its relationship shift in India's nuclear policy that with the Soviet Union in the 1960s might move New Delhi and Washing- following the American reluctance to ton closer to agreement on the ques- assist it in building its military capation".4 Sulzberger underlined that bilities after the Sino-Indian border "Moscow's relations with India have clashes in 1962. Later, India's diplobeen worsesnedby the election".5 The matic isolation and helpless plight in seemingly far-reaching new possibili- 1971, burdened with 10 million reties opened up for Washington were fugees, while the US and China renmost dramatically expressed by Joseph dered political and material supp9rt to Kraft: Pakistan, tacitly and openly, drove The setback suffered by Mrs Gandhi India into a treaty that year with the India Soviet Union to secure diplomatic proand the Congress party in tilts the world balance of power. It this tection in its endeavour to cope with offers fresh opportunities to its critical situation. The result of the even more - its and country quasi-ally, China, to advance their ensuing war was the achievement by positions at the expense of the So- India of a pre-eminent position on the viet Union... That suggests a turn- sub-continent, a status that it secured ing to the United States and the world community for aid... Together against the vigorous opposition of the 1185

July 23, 1977 US and China, but with the crucial support of the Soviet Union. Soon thereafter, Indira Gandhi told C L Sulzberger that "We Indians are unable to be grateful to anybody", and India eagerly asserted its independence by insisting on negotiating directly and bilaterally with Pakistan rather than under Soviet auspices as at Tashkent after the 1965 war. Subsequently, the Indians expressed a desire for friendship with the US through a statement by Foreign Minister Swaran Singhwhich the New York Times labled "Indian Love Call" and gratuitously attributed to Indian need for food in which he underlined the sentiment that "we cherish common values of an abiding nature such as our belief in democracy and a democratic way of life, individual liberty and human dignity". A thaw gradually developed in Indo-US relations, and in due course the US made gestures toward a tentative, but in reality only symbolic, accommodation with India as the region's pre-eminent power. This process reached its climax with Secretary Kissinger's visit to New Delhi in 1974, when apparently "a new page" was turned, with Kissinger accepting non-alignment and acknowledging, that "the size and position of India give it a special role of leadership in South Asia and in world affairs". Joint commissions were established to give more substance to the relationships between the two countries. The process of reconciliation was rudely disrupted, however, with the lifting of the arms embargo by the US and the opening of the arms pipeline to Pakistan in early 1975. Despite that, the two countries continued to maintain a dialogue through the joint commissions. The declaration of the Emergency in mid-1975 strained relations further, following the experssion of disappointment by US officials and the strident criticism by the American mass mec,ia. American observers even speculated that India might attack their ally Pakistan in order to rally mass support. On the other hand, the Soviet Union and its allies extended support to the Indian government. It is likely that- the Soviet Union soon regretted having expressed such support. For in the first half of 1976, the government of Indira Gandhi undertook a series of swift foreign policy initiatives which had the potentiality of altering the inherited pattern of relationships with the major powers. In April the government called for a meeting between India and Pakistan 1186

ECONOMIC AND POLITICAL WEEKLY to resume diplomatic and trade links, which resumption took place subsequently. A few days later, it announced agreement between India and China to exchange ambassadors after a break of some 14 years, signalling a thaw. Around the same time, American Ambassador Saxbe announced that relations between India and the US were beginning to thaw. The momentous nature of these events was not lost on observers. One major American newspaper noted editorially: Leonid Brezhnev has seen India as the key link in a Soviet-dominated chain of states Moscow has sought to create in Asia for the containment of China. Now all these past calculations have been upset by the new possibility of a Sino-Indian rapprochement.7 At the same time, it called attention to "the radical potentialities for world balance of power as a whole arising from the Sino-Indian decision to exchange ambassadors". And two days later, it returned to the subject: It is most unlikely that mere coincidence is at work when New Delhi announces within a few days that it will exchange ambassadors with China and that it will take steps to normalise relations with Pakistan, its two principal enemies during the past decade or more. In the same period, United States Ambassador William B Saxbe proclaims that he sees improvements in United StatesIndian relations... this turn in Indian foreign policy has to be greeted enthusiastically by all who wish a more peaceful atmosphere in Asia. The one capital where there is probably concern about Mrs Gandhi's new activist peace policy is Moscow... the Soviet Union will have to recognise that India is achieving greater freedom of action as she seeks a wider variety of friends throughout the world.8 The assertion of Indian independence in relation to the Soviet Union thus has been of much earlier origin than the installation of the Janata government. Indeed, it could be placed even earlier - the nuclear explosion of 1974, which was no less unacceptable to the Soviet Union than to the US, or perhaps to the bilateral process of negotiations with Pakistan at Simla in 1972. The basic reason for this assertion would seem to be that India's earlier intimacy with the Soviet Union was congruent with its situation in the region's power configuration; once India's power position in the subcontinent changed in 1971 it could not be without impact on its diplomatic posture. It is well to remember that that position was achieved with Soviet support, but in the teeth of opposition from the US and China. It may well be that, as Ambassador Saxbe put it, "that honeymoon is about over, simply because the Indians are beginning to realise they are being used".9 Lacking any specification about what the Indians were being used for, that interpretation would seem to be unreliable. To demonstrate that India's opening to other countries would not be at the cost of its relationship with the Soviet Union, Prime Minister Indira Gandhi visited the Soviet Union in June 1976. More to the point perhaps is the notion that the Indians had gotten out of the Russians all they could possibly get by way of- trade, technology and diplomacy, and that now benefits lay for them, as they did for the Russians, in a closer relationship with the West. Also, there may have been consciousness of greater arms self-reliance; as a European diplomat told the New York Times correspondent,' William Borders: "As India's arms dependence on the big powers decreases - and it is decreasing rapidly - the big powers' influence over the course of events in this part of the world is also reduced."10 Additionally, the end of the Vietnam war had removed one salient point of friction between India and the US. At any rate, the second half of 1976 saw frequent expressions about improvement in India-US relations. In June, at home in Mechanicsburg, Ohio, for a visit, Ambassador Saxbe stated that relations between the two countries were improving. In November, he felt "encouraged" about the improvement, stating there were "no basic problems". Again, that "we have turned it around. It has been a slow process, but I'm pleased with the developments". 11 Around the same time, retiring Ambassador Kaul declared that relations were "much better now" than during 1971-73, and predicted "a marked improvement" soon. 12 Newlydesignated Ambassador Kewal Singh noted "there are no basic issues on which we have fundamentally opposed points of view", and envisioned "a very bright future" for Indo-US relations. Later, he announced that "in the last two years, good efforts have been made to build up our relations in a manner that they have become mature". Again, he stated, "the legacy of mistrust and misunderstanding is happily a thing of the past". 13 Not all was smooth sailing, however. Two major irritants continued to dog relations betwveen the two- countries:

ECONOMIC AND- POLITICAL WEEKLY arms transfers to Pakistan and withholding of enriched uranium shipments to India. Prime Minister Indira Gandhi several times expressed concern at the arms transfetrs to India's neighbours. On the reported prospective sale of 110 A-7 jet bombers, the Times of India in an editorial on November 19, 1976 chided: "The Pentagon's reported argument that there need be no arms race in the subcontinent as a result of the A-7 deal is patently disingenuous." On the uranium shipments, it must have seemed to the Indians that President Ford was using American leverage to modify Indian policies much as President Johnson had used food shipments. The final decisions on these questions were, however, left over to the Carter administration. The election of Carter raised expectations of an improved relationship to a new height. Democratic administrations, though sometimes mistakenly, are often expected to be more friendly towards India. Although advocating a 'low posture' policy toward South Asia, the Democratic party platform had already recognised that "India has now achieved a considerable degree of hegemony over the subcontinent" and suggested "that future American policy should accept this fact". Even before the inauguration of the Carter administration, Times of India correspondent in Washington cabled that he foresaw "a new chapter in Indo-American * relations" and that Ambassador Kewal Singh "has already sensed this in his many talks with lea(ding members of the Eastern establishment". After the inauguration, he reported that "strong signals are being exchanged between Washington and New Delhi that spell happier times for Indo-American relations. A determination to put back these relations on their rails on the part of the Carter administration is becoming increasingly evident to observers here." He continued: "The attention that Indian officials are receiving at the highest levels of government can only be construed to mean that a sea-change is coming over Indo-American relations that augur well for the future." 14 Meanwhile, by the end of 1976, the American news media had toned down its criticism of the Emergency, apparently impressed either by its prospective permanence or by its economic gains, given the laudatory reports of the World Bank. After the Indian elections were announced, President Carter told Am. bassador Kewal Singh, "very! good news" from India, India was "very much in our hearts", and "my mother was 'ambassador' to India". As for the Indiaft government in relation to these new developments, the Samachar news agency celebrated Indira Gandhi's ten years in office by reporting that in regard to the US "Mrs Gandhi looks forward to further strengthening of friendship for mutual benefit and in the cause of international understanding and co-operation". More significantly, in an interview with Polish correspondents a few days earlier, Indira Gandhi stated that India neither sought any exclusive relationship nor thought its relations with any one country should affect or be at the cost of its bilateral relations with other countries. 15 It can thus be seen that the apparent assertion of independence from the Soviet Union by India and the apparent cordiality between India and the US was not something generated with the inauguration of the Janata government in India, though Indira Gandhi left behind to the successor government a greater margin of manoeuvrability, having accumulated a food buffer stock of 20 million tons and foreign exchange reserves of some $3 billion. At the same time, despite the degree to which the new government's intentions departed sharply from the previous pattern of India's relationships, it soon became obvious that the exercise of power and responsibility had persuaded the new government to retract from its hasty declarations. Within a week of the new government's formation, Foreign Minister Atal Bihari Vaipayee ruled out any change in foreign policy; he declared that "foreign policy was not an issue in the election campaign", that "there has always been a broad national consensus on external affairs", and that the government stood by its commitments. 16 Soon thereafter came the announcement that Soviet Foreign New Minister Gromyko would visit Delhi near the end of April, an apparent indication of the priority Moscow gave India in its foreign policy. Meanwhile, Vaipayee expressed confidence in an interview with Soviet television about further strengthening the friendly relations between India and the Soviet Union. The new government apparently made a serious review is of the Indo-Soviet treaty and it instructive to note that strictly on its own, two days before Gromyko's arrival, the Indian government announced that it would not cancel the treaty,

Jly 23, 1977 stating "India stands by its foreign policy obligations". 17 It was obvious that the Indian government had no wish to alienate the Soviet Union. In a pithy article, a perceptive American had predicted why it should be so: "no Indian government is likely to foresake the 'spcial relationship' with the Soviet Union so long as there is a China." 18 And casting the net wider, the normally pro-American editor of the Times of India, Girilal Jain, admonished: "It will be dangerous for this country to lean in other directions without the anchorsheet of firm and close ties with the Soviet Union, because it can thereby open itself to manipulation by the West, particularly the United States, which though maimed, has not ceased arrogating to itself the role of establishing a so-called stable world order under its auspices." 19

Subsequently, the Gromyko visit ended with an affirmation of the treaty, of their "identical or close" positions on many international question, and of their determination to strengthen relations; aid agreements were also signed. Vajpayee assured the Soviet Union: "The bonds of friendship between the two countries are strong enough to survive the demands of divergent systems, the fate of an individual and the fortunes of a political party. In the changing international situation over the years Indo-Soviet friendship has remained a constant factor for peace and stability in Asia and the world.'u2 Meanwhile, high-level contacts were maintained between the two countries, including the visit to New Delhi of the Soviet commanderin-chief. No small part in the continued Indian protestations of friendship for the Soviet Union may, of course, have been played by Indian requirements of sophisticated military equipment and oil supplies. The determination to maintain good relations with the Soviet Union does not detract from the vast improvement in India-US relations, with a somewhat emotional quality on the part of Indian leaders, because of their experience with the loss of civil liberties during the Emergency and with the lack of earlier direct experience of an encounter with American power. This became especially marked after the decision to resume uranium shipments, the cancellation of the A-7 bomber deal with Pakistan, and the prospect of renewed bilateral economic aid. However, several limits to intimacy between the two countries 1187

July 23, 1977 must induce caution about their future mutual relationships. First and foremost, the fundamental aim of US foreign policy since World War II has been, and continues to be, the containment of the Soviet Union, and it is doubtful if India will ever be a party to this containment. Here, China is a more serviceable instrument for the US and the level of American intimacy with India, including bilateral aid, is more likely to be determined by China's wishes, though the US may refrain from pushing India into a deeper relationship with the Soviet Union. For India to move closer to the US at the cost of its relationship with the Soviet Union would be hazardous, for while India may be able under certain circumstances to moderate to some extent possible US hostility or indifference on the basis of common political values, a Soviet Union aligned with Pakistan would pose real problems for India. Secondly, while the new government of India will be appreciative, because of its own experience, of President Carter's stand on human rights and will likely make it a plank to push for closer bilateral relations with the US, it will be reluctant to make it an issue in relation to the Soviet Union - just like the US does not make it an issue in relation to China - especially when India is itself so vulnerable on its own neglect of even more fundamental economic rights for the masses. Thirdly, arms transfers to India's neighbours will remain an irritant. The American reluctance to supply some items will be taken less note of for Indian gratitude than the- vastly larger arms transfers that will continue to be made. The US is not likely to leave the region for India's sake. It is instructive to note that, like Indian officials before him, Foreign Minister Vajpayee was saying as late as May 1977 that he hoped for improved relations with the US but had to point out that there were some major irritants between the two countries, such as arms supplies to Pakistan and withholding of uranium shipments to India. 21 Fourthly, it would seem - at least according to one American sociologist that, despite the talk of the 'love affair' with India, Americans are more comfortable with an India that is not friendly, especially in contrast with China. Nathan Glazer argues: Specifically, consider the history of the American image of India. Poverty has always been part of that image. Spirituality in the service of politit1188

ECONOMIC AND POLITICAL WEEKLY cal' ends, as in the case of Gandhi, has been part of that image. When we are on good terms with India, we think of making a contribution to solving India's poverty, and we are impressed by such statesmen as Gandhi and Nehru. When we are on bad terms, we see poverty as India's fault and get impatient with it, and we see the strong and distinctive line of Indian leaders as sanctified hypocrites. The change from one form to another is in a large measure the result of policy changes... In time, the reasons for the deterioration in relations is forgotten, and what is left is the reality of bad relations which affect the valence of the long-held images of India... Just as we may admire at one point the Indian emphasis oir religion, and denounce it as superstition the next, so we may admire Chinese intelligence and hard work at one point, and fear it as serving devilish ends at another. What is not possible is to see Indians as totally indifferent to their religious precepts, or to see Chinese as lazy and stupid... As Harold Isaacs debecause of monstrated, Americansseem pretheir image of China disposed to be friendly and positive toward that country; because of their image of India, they are predisposed to be less positive and less friendly. This does not mean that policy considerations may not lead us to be closer to India than to China... but the weight of the images held seem to make most Americans happy with the opposite arrangement.2 Psychological explanations are often hazardous, but it is significant that the negative images are strongly held by Americans. While Senator Moynihan could exult at the peaceful transfer of power in India in March 1977, he had earlier, in the same month in an interview with Playboy, said: "When India ceased to be a- democracy, our actual interest there just plummeted. I mean, what does it export but communicable disease?" And not long ago, serious men in the US were recommending the 'triage' treatment for India. Fifthly, at a political level, there is the irritant associated with the nuclear question. American pressure to entice or coerce India into accepting safegdards on its nuclear installations will not only be resented but will be resisted, especially with the new government having to face an opposition which will be ready to call any concession on this point a surrender to the US. Even if the present government concedes on this point, even if privately, it will only signal. serious trouble in the future, for Morarji Desai is not immortal and his government has no permanent mandate, and Indian foreign policy is responsive to larger social forces which run counter to any limitations on India's future options. Most fundamentally, the US has to confront the question whether it accepts India, not just symbolically but substantively, for what it is or thinks it is - a potential major power. In the post-war period, US policy has been to oppose the major regional power through alliances with its smaller neighbours. The question now is whether the US is ready to reverse this inherited posture and pursue a policy of accommodation - rather than of containment and satellisation toward- the regional power. In the case of India, the issue has not been better expressed than by Myron Weiner: "It remains to be seen whether the United States develops an adversary relationship with India driving it still further into the Soviet arena, or is responsive to India's quest for a larger role in regional and international politics."23 This, indeed, is the critical issue in the relations- between the two countries, all else is subordinate. No amount of foreign aid will substitute for it. A policy of accommodation toward India as one of the regional powers would, however, require, in the words of a former US official, "American acquiescence in the policies they follow within their regions and non-interference in their relations with their neighbours".24 This would raise questions about the entire structure of US relationships with the region, not just of bilaterally improving relationships witn India. And these questions are not likely to be decided on the basis of personalities or - political values, but in the final analysis and over the long-term considerations of power and interest. It is well to remember that both -President and Congress share powers in foreign policy, and that there is no domestic constituency for India in the US as there is for Israel and Africa.

Notes
1 On the argument and documentation, see Baldev Raj Nayar, "American 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 York Times, April 19, 1976.

ECONOMIC AND POLITICAL WEEKLY 8 "India's Peace Drive", ibid, April 21, 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, November 18, 1976. 12 lbid, November 3, 1976. 13 New York Times, September 20, 1976; Times of India, November 23, 1976 and December 18, 1976. 14 Times of India, July 21, 1976, January 6 and 24, 1977. 15 Ibid, January 24, 1977, and ary 21, 1977. 16 New York Times, March 31, Statesman Weekly, April 2, 17 New York Times, April 24,
p 11.

July 23, 1977 Janu1977; 1977. 1977, Ariye (ed), "Mutual Images: Essays in American-Japanese ReHarvard lations" (Cambridge: University Press, 1975), pp 167-68. 23 Myron Weiner, 'Critical Choices for India and America', in Donald C Hellman (ed), "Southern Asia: The Politics of Poverty and Peace" Lexington Mass: (Lexington, Books, 1976), p 78. 24 William I Barnds, in US House of Repr,esentatives# Committee on Foreign Affairs, "United States Interests in and Policies Toward South Asia" (Hearings; 93rd Congress, 1st Session; 1973), p 129.

18 T D Allman, "India's Images in the 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 Benedict to Herman Kahn', in Akira

Financing

New

Industrial
D R Pendse

Ventures

Some Inhibiting Factors

Several deterrent factors have been responsiblefor the unsatisfactoryperformanceof private sector industry. By far the most importantof these, the author argues, have to do with the financing of new industrial ventures. This article discusses some of these problems and suggests for discussion possible lines of dealing with them.
IF our resolve to remove poverty and unemployment has to become a reality in the foreseeable future, there is no escape from our having to conceive and implement a large number of new industrial projects. Recent trends in investment have however been very discouraging, entirely deserving the description 'investment crisis' in the Janata party manifesto. Several deterrents were responsible for this inadequate performance of industry. These have lately received some attention and analysis. But by far the most serious single deterrent, particularly for the private 'sector, lies in the set of problems of financing new industrial ventures. These have now become king-size, but they are manmade, and, happily, by no means insuperable. This arti6le will express conof structive dissatisfaction at some these and suggest for discussion some lines of tackling them. Three problems will be highlighted viz, (a) the debt-enquiry ratio; (b) delay and (iii) the convertibilty clause. A new industrial project in the private corporate sector is undertaken usually as an expansion or a diversification plan of an existing company; or by promoting a new company for the new unit. Long-term finance (as distinct from working capital) for these industrial projects has to be sought 'from outside or has to be generated from internal sources. In recent years, companies have had to rely more and more on internal sources; primarily because they experience a host of difficulties in securing the needed funds from 'external' sources. These external sources are mainly, (i) equity capital (rights or initial issues), (ii) preference capital, (iii) convertible debentures, or (iv) borrowings (loan or debentures) from financial institutions (such as IDBI, IFC, ICICI, etc). Amounts collected from prefercnce capital, or convertible debentures are small and inadequate. Therefore corporate managements face the task of finding a correct mixture of (i) equity, and (ii) borrowings (or debt). With this, the problems begin. industrial projects to come up, and since equity, which is one of the two chief souirces of finance (iz, debt and equity) is proving unpopular, the remaining other source, viz. debt, will naturally be called upon to share a larger burden at least until equity regains its attractions. At times this share may be in excess of the one that is demanded by the notional optimum debt-equity mix; but that cannot be helped. Unfortunatelv, government's financial institutions which are the monopoly suppliers of 'debt finance' are not always willing to oblige and accommodate. There is no such thing as an 'optimum ratio' specified for different industries; governments guildelines in 1975 had laid down 2:1 as a fair and a reasonable ratio; but financial institutions seem to have a wider spectrum
-

D.ebt-Equity Ratio
In principle, there would, of course, be something like one optimum debt: equity mix, for any given project, and this optimum would depend on various considerations. In practice, it is becoming increasingly difficult to keep strictly to this 'optimum', becaiuse for quite some years now, equity itself is losing its glamour, which it had in the early sixties. Several factors, such as the slack stock market, the setback in corporate profitability, high interest rates on corporate and other deposits, etc, contributed to the decline of the equity cult. It is not necessary to discuss these here. The point to reckon with is that since we need many new

say, 1.5:1 to 2.5:1 -

in mind.

The rationale behind this thinking seems to be sonmethingas follows: The institutions would like the promoters to contribute at least 15 per cent of the total project cost, all in the form of equity. The promoters in turn are keen to have effective control over management, and, in their view, this is generally not possible unless they hold at least 40 per cent of the equity capital itself. If the project cost is say Rs 100 lakhs, reconciling these two considerations implies that the promoters must hold an equity of Rs 15 lakhs; outsiders should 1189