Commentary: India: Luring Investors Will Take Real Change

By Manjeet Kripalani

On May 10, the Indian government nudged open the door a little wider for foreign investors. Under new rules, overseas entities can now wholly own hotels, airports, and pharmaceutical companies. They can even buy up to 26% of Indian defense contractors, in what was until now a closed sector. The announcement continues a process, begun in 1991, to roll back decades of state protection and open wide the economy.

So will New Delhi's latest move release an invigorating flood of foreign money? Not likely. Though it boasts 100 million middle-class consumers and a world-class high-tech industry, India remains a tough place to do business. The new investment rules aside, crumbling infrastructure, widespread corruption, sticky labor laws, and red tape will continue to deter foreign investors.

Indeed, foreign direct investment has been falling steadily in recent years (table). What's more, important existing investors, including Bell South, Vodafone, and, most notably, Enron, are abandoning the country. "If India can't look after existing FDI," says Arjuna Mahendran, chief economist for SG Securities Asia in Bombay, "forget fresh investment."

PULLING THE PLUG. The list of unhappy investors is a long one. The most significant are in the power and telecom sectors, which together contributed half of the $12 billion in FDI that India has lured since 1991. A week after New Delhi issued its new FDI rules, Houston-based Enron Corp. said it would terminate a 20-year contract to supply electricity to Maharashtra state. To be sure, Enron is a special case--the company is locked in a dispute with Maharashtra officials over the price it charges for power. Still, Enron's $2.9 billion Dabhol plant represents India's single biggest foreign investment, and the company's decision to flee is having a chilling effect on other foreign power companies. Michigan's CMS Energy Corp., which has been negotiating to build a 1,850 megawatt, $1.4 billion power plant as part of a consortium, recently sent its execs home, retaining just a skeleton staff at its Madras office.

Foreign telecom players have fared little better. AT&T and Hong Kong's Hutchison Whampoa Ltd. have pumped a combined $1 billion into India over the past seven years but have no profit to show for it. And politically inspired rule-changing seen to favor Reliance Industries, a private local carrier, has prompted them to halt further investment. Ditto for Vodafone and Bell South, which have quit in frustration. Says one telecom executive whose company is among several that have taken the government to court over alleged contract violations: "India is a cussed country to operate in. It is highly user-unfriendly."

Even such emerging-market veterans as Coca-Cola, Ford Motor, and Hyundai suffer from India's high taxes, poor infrastructure, and onerous regulations. Coke vows to soldier on, but it has had to write down $400 million on its Indian operations. Ford, which has been making cars in India since 1996, has yet to break even. Right now, says Ford India chief Phil Spender, "the feel-good factor is clearly down."

The government's investor-positive attitude has attracted attention from one quite unexpected quarter. On May 14, a delegation headed by the vice-governor of China's Guangdong province swept into Bombay and signed off on $100 million in contracts that will see Indian companies assembling Chinese products and selling them locally. For example, the importer Baron India already assembles TVs built by the Chinese manufacturer TCL and sells them for 20% less than domestic brands.

This is hardly the kind of investment the government was hoping for. Indeed, with price-sensitive Indians snapping up cheap, locally assembled Chinese goods, domestic companies can only suffer. What India really needs is the more advanced manufacturing and high-tech savvy of Western and other Asian multinationals that provide good jobs, training, and long-term investment.

The government has a daunting challenge: It must salve the bruised feelings of existing investors and provide real incentives for new ones by ending political interference and modernizing archaic laws. Otherwise, the new rules will be useless. The way things are going, the world's 11th-largest industrial nation could find itself at the bottom of the FDI list. A small loss, perhaps, for multinationals. But a big one for India.

Kripalani covers Indian business from Bombay.

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