Foreign Investment: Finally, India's Door Starts To Open

The ruling BJP is making good on its promises

The pronouncements out of India these days sure sound encouraging. The government has pledged for the first time to allow foreigners to own 100% of local businesses in many industries and to lift restrictions on venture capital. That means foreign money can flow to startups--especially hot Internet companies. Officials figure that just by allowing 100% foreign ownership, they will increase investments to $10 billion per year, up from $3 billion now. New Delhi is also considering opening the telecom sector to foreign interests.

So is India's ruling Bharatiya Janata Party turning into India's most progressive, reformist government ever? Perhaps. Prime Minister Atal Bihari Vajpayee is a popular leader, and there's little resistance from the enfeebled opposition Congress Party. With India's budget deficit ballooning, policymakers are accelerating reform to reduce spending and draw in more sources of cash.

It may take months before these reforms are enacted. And given India's slow, noisy democracy, they may not be implemented in every respect. But foreign companies are taking notice. "This could mean entrepreneurs could invest in India with as much ease as they can in Hong Kong or Thailand," says Vijay Sahni, senior partner at accountants Arthur Andersen India.

FORTRESS INDIA. That would be a huge change. Telecom companies had almost given up hope of doing business in old India's oppressive state-dominated regime, where the regulator was also the monopolist and chief competitor to private players burdened with multimillion dollar licensing fees and operating losses. But now that's changed, and foreigners may soon be allowed to set up without a local partner as previously mandated. AT&T was once so fed up it almost pulled out of its two cellular ventures with the Aditya Birla group. But now it hopes to take one venture public, making it India's first ever telecom IPO. Dow Corning, whose presence in India had been restricted to a 49% stake in a lubricants maker, recently got clearance to buy out the company. Says Dow's Urmil Gandhi: "Now more companies like Dow will come into India and grow their operations."

Getting every last reform through the system will not be easy. Many of the new investment rules, while not requiring legislative approval, still have to be worked out by government departments, where they could get watered down. And reforms requiring legal changes, such as in telecoms, won't be considered until May when Parliament debates the budget. "We're still living behind the remnants of Fortress India's walls," cautions Sahni.

So far, though, Vajpayee's government has surprised skeptics by delivering on a number of promises. In the past four months, the BJP opened the insurance industry and boosted India's software sector by allowing local companies to list overseas without government approval. In telecommunications, the government has allowed in private Internet providers, breaking the state's monopoly. Regulators promise to let private telecom players into the domestic long-distance market in March. Amid vehement protest from the communist and socialist parties, the BJP has also cut subsidies on fuel and held steady on reforms dividing up the power sector, even when faced with strikes.

When Finance Minister Yashwant Sinha presents his budget for 2000-01 to Parliament on Feb. 29, analysts expect more tough measures. These include linking states' funds from New Delhi to structural reform, further simplification of India's complex tariffs, and more subsidy cuts. Sinha has long been trying to cut subsidies, which make up nearly 14% of India's $400 billion economy. But he has met strong resistance from politicians who represent India's wealthy rural classes, the beneficiaries of free electricity and cheap fertilizer.

Even with these reforms, India's nationwide budget deficit is out of control. It went from 7% of gross domestic product in 1998 to an anticipated 8.5% this year. That's causing concern among analysts who want to see India get spending under control and speed up plans to raise $2.5 billion a year by privatizing state-owned enterprises. So far, powerful politicians and noisy unions have gotten in the way, causing the government to fall woefully short of its target.

The BJP hopes to pick up the pace this year. That may be painful, but the way the BJP sees it, that's the only way to solidify its legacy as the reform-minded government that really did reform.

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