India Is Ready For Takeoff

But business waits for reforms

Since its founding in 1928, Camlin Ltd. has built itself into India's premier art-supplies maker, churning out $35 million worth of product a year--from paints and brushes to stationery. By squeezing costs, Camlin grew revenues by 25% last year, and kept profits from declining in a decidedly low-margin business--despite withering competition from cheap Chinese imports and such foreign behemoths as Germany's Faber Castell.

Respectable growth, to be sure. But to get really efficient, Camlin Executive Director Ashish Dandekar reckons his company should reduce its workforce by 40%, to 600. But he can't without sparking a backlash in a nation wedded to a socialist past. To retrench workers, firms require approval from both employees and state governments--permission that is rarely granted.

So Dandekar continues to cut costs, increase capacity through automation, and persuade staff to retire, as he waits in vain for government reforms so businesses such as his can meet the Darwinian challenges of an increasingly open economy. "Our politicians are not able to unite on anything, and business and the economy are the first casualties," he says. "The need of the hour is to put economics above politics."

Businessmen like Dandekar are fighting to make themselves heard over all the hype about a newly ascendant India. For decades, the nation languished while many of its Asian neighbors became dynamos. Just nine years ago, India nearly defaulted on its foreign debt. Now, economists are waxing ecstatic over the former plodder, saying it is set to become Asia's next tiger.

HEALTHY NUMBERS. The numbers certainly are impressive: Economic growth should near 7% this year, and interest rates have fallen almost six points from four years ago, to 11.5%. Foreign reserves stand at $35 billion, up from barely $1 billion in 1991. International Monetary Fund chief Horst Kohler recently said India could soon achieve sustained growth of between 8% and 10%, as China has done for two decades.

Under Prime Minister Atal Bihari Vajpayee, India has its first stable government in four years. Sales of everything from cosmetics to cars are soaring as consumers open their wallets. Add to this a booming high-tech sector, and Credit Suisse First Boston economist Prasenjit Basu declares India "the stealth miracle economy of the decade."

But talk to Indian businesspeople, and they tell a different story. Those in the commercial trenches say the government risks squandering the progress made so far unless it summons up the political willpower to take reform to the next level. On their wish list: an overhaul of draconian labor codes, lower interest rates, and tax reform. "Everyone can go wild on the macro numbers," says Camlin's Dandekar. "But there's very little real liberalization."

Other more worrisome problems call into question whether India is set for takeoff at all. Despite all the praise heaped on Vajpayee's team, public finances are a wreck, thanks to profligate spending by the central government and local authorities alike. Optimists may be hailing India as the next investment hot spot, but foreign direct investment has in fact been falling in the last three years, from $3.5 billion in fiscal 1997 to $2.1 billion in 1999. Blame that largely on vacillating policies and nuclear tests in 1998. The March visit of President Bill Clinton may lift the numbers, but the current trajectory bodes ill for a nation that each year must find work for 20 million new job-seekers.

RESTRUCTURING. If business is grumpy, it's because while the government dallies on reform, Indian firms are laboring to get their own houses in order. The $9 billion Tata group, for instance, has been automating plants and downsizing--the steel division is spending millions on a voluntary retirement scheme for 2,900 workers. Meantime, Tata is exiting such noncore businesses as cement and personal products, while consolidating steel, autos, and software.

The new willingness to restructure is due in large part to trade liberalization. Tariffs are down to an average of 22% from 100% just seven years ago, forcing Indian companies to compete with imports. Another catalyst: a concerted effort to dismantle what Indians call the "license raj"--a system of overlapping permits put in place to maintain state control of the economy. Yet business still finds itself penalized due to the government's inability to push through further reform.

Besides a radical shift in labor policy, businesspeople are clamoring for a new bankruptcy law that will allow firms to fast-track a process that currently can take years. They want the government to clean up a financial system that is burdened by nonperforming loans in the agricultural and industrial sectors. Only then may risk-averse banks lend at reasonable interest rates. And they want the government to lay new phone and power lines, and build more roads.

The government also must make good on its vow to raise $2.5 billion by selling off much of the state sector. But privatization has many foes, not least the unions. The Air India Employees Guild is resisting a sale of Air India, the loss-making national carrier, and blames New Delhi for its woes. Even as New Delhi opens up oil exploration to multinationals, it has reneged on numerous promises to privatize the state oil sector. That could further delay the big ambitions of Shell Oil, Exxon Mobil, and Malaysia's Petronas, which are all angling for a piece of the action.

Few doubt that Vajpayee is serious about economic reform, but every time his government retreats in the face of special interests, the message gets muddied. To appease coalition partners, for example, in 1998 his administration unwisely hiked civil servants' salaries by 10%, bringing the wage bill to $8 billion, or 2% of GDP. Last year, it hired 80,000 new hands in the bloated railway and telecom departments. No wonder the budget deficit is running at 10%, way over the IMF's recommendation of 3%.

India has come a long way in a short time. The economy is growing faster than it has for three years. Business is doing many of the right things to become globally competitive. But if the government shirks from doing its part now, India could yet again turn out to be a tale of lost opportunities.

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