Manohar Joshi, the newly elected chief minister of Maharashtra, says he welcomes foreign investment to his Indian state and its capital city, Bombay. So why is his new Hindu nationalist government considering canceling Enron Corp.'s $2.9 billion power project, signed before his election in March? "The people asked for a review. Therefore, we are reviewing it to see that it was properly signed," Joshi told BUSINESS WEEK.

The threatened cancellation of the Enron deal, now under consideration by a Maharashtra government committee, reflects a new wave of regional assertiveness in India (table). Despite the four-year push by Indian Prime Minister P.V. Narasimha Rao to promote economic liberalization and foreign investment, many state governments are ignoring national policy and carving out independent positions. The movement is growing as a result of key election losses by Rao's Congress Party, which now controls just six of the 17 major states, vs. 10 nine months ago. Says Charan Wadhva, an economist with New Delhi's Center for Policy Research: "The state level is where the action is."

MUSCLES. Regionalism has cast a cloud over foreign investments. Not only has Enron become a political volleyball in Maharashtra, but a second project is in trouble. Maharashtra's new coalition government, linking the Hindu nationalist Shiv Sena and the Bharatiya Janata Party, is squabbling over honoring an agreement with the Hindujas, the British-based Indian business family, to build a new international airport in Bombay.

Other states are flexing their muscles as well. In the state of Andhra Pradesh, the new Telugu Desam Party government rose to power by bashing the national government's economic reforms as hurting the poor. Upon taking office, the government reviewed an approved power project being put together by CMS Generation Co. of Dearborn, Mich. The deal is still alive, but some observers privately worry the issue could be resurrected.

Even states led by Congress governments are less inclined to follow New Delhi's dictates. The new Congress-led government of Orissa is reviewing the $650 million power project proposed for its state by AES Transpower Inc. of Arlington, Va.

The state reviews have threatened India's biggest selling point in the competition for investment against other nations such as China: rule of law. Indians have long pointed to their English-based legal system as a guarantee against arbitrary government interference. But with Maharashtra questioning a signed contract such as Enron's, "they are throwing all this stuff that India can take credit for, like rule of law and sanctity of contracts, out the window," says a Western diplomat.

Foreign companies must also get used to wooing local opposition parties. Faced with resistance, DuPont Co. was forced to abandon seven years of efforts to build a nylon-tire factory in Goa in May and move to another state, Tamil Nadu. To head off union opposition to its telecom project in Tamil Nadu, US West Inc. is working closely with the government and residents. "We've been crawling all over the place," says Jay Dehejia, an adviser to US West.

QUIET DOWN. Ironically, while newly elected regional governments are reconsidering deals signed by their predecessors or the central government, they are also seeking new investments. Even as his government ponders the Enron deal, Maharashtra's Joshi took a swing through Britain and the U.S., where he signed a preliminary agreement with Black & Veatch, based in Kansas City, Mo., for a project to improve power plants around Bombay. "There is not that much difference between the central government's policy and the policy of my state," he insists.

That's exactly what the Rao government hopes. After four years of reform, the Indian Prime Minister does not want to lose control of economic policy before national elections scheduled for early next year. Most of what's going on now, some analysts say, is politicking that will quiet down after the vote. Others worry that states may try to grab more power.

The ascendance of opposition parties in the states could have some lasting effect: While Maharashtra is seeking foreign investment for Bombay today, the government plans to change the city's name back to its original in the Marathi language. Soon, Enron, Black & Veatch, and other companies will worry about their investments in the new Mumbai.

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