`Bombay Has Spun Out Of Control'

With extremists in charge, many businesses are fleeing

It was a surprising defeat. India's four biggest cities were vying to be chosen as the site for a new business school run jointly by Northwestern's Kellogg and the Wharton School. Everyone assumed Bombay, India's top city of industry and commerce, had the inside track. But on Sept. 6, Hyderabad won. The state government of Maharashtra, of which Bombay is the capital, demanded the school pay $5.7 million for a plot of land--and reserve 10% of its places for students of Maharashtrian origin. Hyderabad offered more land for just $150,000 and showered the project with tax breaks and incentives.

Bombay's city fathers are philosophical about the loss. "It's not the end of the world. Bombay's strengths remain," says Industries Development Commissioner Jayant Kawale. Yet Bombay is showing signs of losing its preeminence, thanks to high costs, scary politics, and crime. Already, half of Bombay's population lives in shanties. Without swift action, this city of 12 million may face permanent decline.

Bombay's loss of prestige has been gradual. In recent years, many foreign companies have chosen Bangalore, Hyderabad, and Madras over Bombay for their headquarters. In a survey by Bombay First, a private initiative to revitalize the city, most companies complain of sky-high property prices. Low quality of life is also a big turnoff. Deepak Fertilizers, bleeding from high overhead in Bombay and oppressed by local edicts, moved its base to Pune and immediately turned a profit. Two banks, Standard Chartered and ANZ Grindlays, which have long operated in Bombay, recently moved backroom operations out of the city.

HARASSMENT. The taxes drive executives crazy. There's the octroi, a 2% charge imposed on any product that enters Bombay, as well as a slew of customs, excise, and sales taxes. The result: Everything is 15% dearer than anywhere else in India. In August, Bombay diamond merchants closed for a day to protest harassment from tax authorities. "We told the government, the trade will just go to another state. Already many factories have moved to Gujarat, which charges no tax," says Vasant Mehta of the Gem & Jewelry Export Promotion Council.

Systematic tax cuts seem in order. But don't count on it, even though the city accounts for 40% of all the direct taxes collected in the country. Bombay's municipal corporation, which runs public services, has tax revenues of $650 million, but expenditures are $700 million, and most of that goes to salaries. Admits Municipal Commissioner Girish Gokhale: "It is because of our weakness in fighting trade unions."

Since 1995, the city has been run by an inexperienced coalition of the right-wing Bharatiya Janata Party and the Shiv Sena--a Hindu-first group best known for its rough street politics. A recent investigation blames Shiv Sena for starting the devastating riots of 1992. Shiv Sena supremo Bal Thackeray is a former cartoonist who admires Hitler.

Crime is a growing problem, as are tensions between religious groups. Gangs now even confront ordinary citizens who leave dealerships with a new car. Crimes of extortion in the city have risen 10% since last year. Meanwhile, friction between Muslims and Hindus is increasing, with Shiv Sena cadres using religious festivals as an excuse to roam the city shouting pro-Hindu slogans. "Bombay has spun out of control," says Gerson da Cunha, a well-known advertising executive involved in urban redevelopment.

Little wonder that the local economy is losing ground. This year, Bombay's excise and customs revenues dropped for the first time, resulting in a $240 million shortfall in the budget, according to Gopinath Sarangi, Bombay's chief excise and customs commissioner. Development Commissioner Kawale says the city is tackling its problems. An expansion of the elevated highway is under way, plans are afoot to develop an offshore financial center, and the city will offer tax breaks to nonpolluting high-tech businesses.

But a $1.6 billion World Bank loan for transport improvement has languished while various departments squabble over its use. Architect Rahul Mehrotra has suggested turning 58 acres of old textile mills into a financial center. Nothing has happened. Says one senior bureaucrat: "What Bombay needs is a pragmatic leader, not some ignorant, self-serving politician." There is none in sight.

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