Can India Compete On The Fast Track?

In 1991, Motorola Inc. wanted to expand in India. But New Delhi bureaucrats, determined to protect their telecommunications monopoly, stalled. Facing endless delays, Motorola decided to beef up investment in China instead. The company is pouring $120 million into China vs. a paltry $10 million in India. "Indians should realize that the world does not stand still," says Amit Sharma, executive director of Motorola's Central and South Asia Div. "There are 20 or 30 countries in the developing world competing for foreign capital."

India's reformist Prime Minister Narasimha Rao knows that, and he's trying to pull his country into the capitalist age. A stubborn socialist-style bureaucracy is only one of his challenges. Bombings and new outbursts of violence in India's major cities, combined with the growing power of Hindu nationalists, are making his task even harder. Surprisingly, the unrest is not scaring away the Americans, who were the leading foreign investors in India last year with a modest $385 million. Financial institutions also are buying in. "There is a saying on Wall Street that you buy when there is blood on the streets," says Madhav Dhar, managing director at Morgan Stanley & Co. in New York.

Is that kind of morbid optimism enough to pull India into the big leagues? India may manage a 4% growth rate this year, but that pales in comparison with China's 12% and Southeast Asia's 7%. Investment and trade, although increasing, are dwarfed by its Asian rivals. And unless Rao can put an end to the ethnic violence, many investors will pass up India for more attractive neighbors.

Rao's strategy for upstaging the skeptics is to keep liberalizing the Indian economy at breathtaking speed. At a convention on Mar. 28 of the ruling Congress Party (I), delegates endorsed Rao's latest economic-reform package, which slashes import duties and excise taxes on consumer goods. "Underlying everything, there is considerable room for optimism," says a Western commercial attache in Bombay.

CONSENSUS BUILDER. For foreign investors, the new policy spells more operating freedom than at any time since independence in 1947. The once soft Indian rupee is now fully convertible to hard currencies, and outsiders can own 51% stakes in joint ventures. Those in the energy sector can own 100% and enjoy a five-year tax holiday to boot. As the world's 12th largest economy opens up, IBM, Coca-Cola, Caltex, and McDonald's are entering a market of 850 million people.

Some American companies even see India as key to their global competitiveness. Gillette Co. recently took 51% ownership in its shaving-products joint venture, and President Alfred M. Zeien says India could become Gillette's largest market. Texas Instruments Inc. is also eyeing the fast-growing Asian market and has been designing integrated circuits and software in Bangalore since 1986. Bigger deals are in the works. Mission Energy, a subsidiary of SCEcorp of Los Angeles, for example, is negotiating to build a $2 billion coal-fired power plant, and Enron Corp. has signed a memorandum of understanding to build a $900 million power plant near Bombay.

America's top investment banks are moving in now that the country's stock markets are open to foreign institutional investors. In February, J.P. Morgan & Co. kicked off a joint venture with Industrial Credit & Investment Corp. of India Ltd. Morgan has a 40% equity interest in the new company, which will be involved in underwriting, securities trading, and other financial activities. Morgan Stanley entered India in 1989 with $200 million in the India Magnum Fund. Today, that investment has doubled to $400 million.

But the Indian leadership is the first to admit that these flows of capital aren't big enough. For every deal that gets done, others are being put on the back burner. To ensure that multinationals continue to take India seriously, Rao needs to control the violence that has wracked the country. One problem is that Rao is a consensus builder who so far has not shown the resolve of the Gandhis. His party is tainted by corruption and infighting. One major difference between India and the authoritarian states of East Asia is that India is an open democracy. China is growing faster, but it keeps a firm grip on any political opposition.

JUNK-FOOD DISPUTE. The opposition in India could make life difficult for such U.S. multinationals as PepsiCo Inc., which launched a food and beverage joint venture in 1990. The right-wing Hindu Bharatiya Janata Party is charging that Rao is going too far in opening the economy to outsiders. "We welcome capital in high-tech areas," says K.R. Malkani, vice-president of the BJP. "But we do not want foreign capital coming in to make soft drinks and junk food and taking away precious foreign exchange." He singles out PepsiCo Inc. for special criticism.

Despite the obstacles, most American heavyweights are still betting that India's center will hold. A week after the bombings in Bombay, Morgan Stanley actually raised its allocations in India from 2% to 5%. Even Cargill India, whose Bangalore office was ransacked by an angry crowd three months ago, is hoping to increase its stake and is negotiating with the government to build a $10 million salt-production facility in southern India. Ford Motor Co. says it is also sticking by its joint venture that cranks out aluminum radiators for India's domestic car industry. "Riots or bombs, these incidents do not shatter anyone's investment confidence," says Suresh C. Chugh, managing director of J.P. Morgan Securities Inc. "We will not shy away this time around." That may be the best news Narasimha Rao has heard in months.