Why New Delhi Is Picking On Pepsi

Foreign consumer-goods makers may get the unwelcome mat

It's an issue that has kept India watchers on tenterhooks: How would New Delhi's new Hindu nationalist-led government treat foreign companies that want to sell in India? After all, this is the party that rose to power chanting a mantra of swadeshi, or self-reliance, and a slogan of "computer chips not potato chips." So when the Bharatiya Janata Party (BJP) formed a government in March, there was concern that it would be hostile to foreigners. Since then, the BJP has made a point of welcoming foreign companies, particularly those that specialize in energy and infrastructure. But what about the dozens of consumer-products companies, including PepsiCo and Seagram, that have invested millions of dollars in India?

They just got their answer. In mid-April, the Indian government fined PepsiCo Inc. $750,000 for an infraction it says occurred way back in 1992. While it's a niggling amount of money, the fine is the first indication that the BJP will not welcome all foreign investors equally. Those like Pepsi that sell to Indian consumers are likely to face harassment.

FOOD FIGHT. In Pepsi's case, the government charges that the company failed to meet an obligation to export the tomato paste, soft drink concentrates, and potato chips it said it would from its Indian plants. When Pepsi Foods Ltd. set up in 1989 in the state of Punjab, it agreed that 40% of its Indian revenues would come from exports. India's Directorate General of Foreign Trade says Pepsi was obligated to export these specific products, and instead substituted rice and seafood. Pepsi, which has so far invested $400 million in India, is furious at being charged. The company maintains that the agreement was to export any foods it processed at its plants, not specific ones.

Making life difficult for foreign marketers is an easy way for the BJP to score points with hard-liners. The party's core base of support--ascetic, middle-class Hindus--is uncomfortable with India's growing consumerism and the proliferation of multinationals. Already, some BJP hard-liners have criticized the government's pledge to adhere to the World Trade Organization, a body they view as infringing upon Indian sovereignty. So the BJP must make at least some token gestures to support the swadeshi agenda. "It will be used as political propaganda," says Arun Kumar, professor at Jawaharlal Nehru University. "They are looking for a gesture to their constituency so they can say, `Look, we did take a line."'

The fine is likely to set a precedent. Most foreign makers of consumer goods that set up shop in India in the last decade have had to promise to export goods, a policy the Indian government devised as a way of boosting foreign currency reserves. Many companies found it too costly to export their main products and have exported other items instead. For example, Seagram agreed to export "liquor products" when it set up in 1995. But instead it has been exporting promotional materials it makes cheaply in India, such as Seagram T-shirts and cloth for the blue velvet bags enveloping bottles of Crown Royal. The reason is that Seagram imports the alcohol it bottles in India, paying a 270% duty. It cannot recoup the cost of that tax by reexporting bottled liquor elsewhere, says Seagram India CEO Akram Fahmi.

Past governments generally overlooked such technical violations, until now. Export Commissioner Anil Swarup insists politics don't play into the decision, and that Indian companies not meeting export obligations may be targeted as well. However, Swarup admits that such monitoring was "low on the priority list" until 10 months ago, when a Parliamentary committee chaired by BJP hard-liner Murli Manohar Joshi criticized his office. Auto companies such as General Motors, with their own set of export obligations, may be next.

For all their tough talk about self-reliance, BJP leaders know that foreign investment is crucial to boosting the lagging economy. But with a key constituency to keep happy, the BJP has decided there is a dividing line. In India now, there are "desirable" foreign investors and "unnecessary" ones--just like back in the 1970s when the Indian government forced out Coca-Cola. The age-old battle goes on.

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