Why Investors Still Shun India

When U.S. Deputy Secretary of State Richard Armitage visited New Delhi in mid-May to sell a new security pact for Asia, he was surprised by the warm welcome he got. The Bush Administration badly wants India to serve as a strategic counterweight to China and is willing to provide political help. On the private side, in return for moving more into the U.S. orbit, India would get additional trade, foreign investment, and technology transfers from the U.S.

The political end of the deal is solid. But investment and technology mostly would have to come from companies that are more ready to exit India than invest in it. Western telecoms, which spent heavily in wireless, think the Indian market is rigged for local players. Consumer giants are smothered in regulation, and almost none make money. The experience of Enron Corp. (ENE ), which is threatening to withdraw from India's largest power project, is a red flag in U.S. boardrooms even though Enron shares plenty of blame for that power fiasco.

Ironically, the investors most interested in India are the Chinese, who, having pounded local Indian manufacturers with cheap exports, are doing joint ventures with the companies left standing. The Delhi government is offering more liberal ownership terms to all foreign investors, which can now own up to 100% of travel, airline, and pharmaceutical companies. That sounds good until you realize that there are hundreds of bureaucrats waiting to trip up anyone who comes in with large expectations.

In the end, India could turn out to be a militarily important U.S. partner living off a shriveled economy. The country desperately needs a leader who inspires economic as well as strategic confidence.

    Before it's here, it's on the Bloomberg Terminal.