India: Losing Faith in a Standout State

Religious violence may hurt Gujarat's business potential

On Feb. 8, a conference called Resurgent Gujarat was launched with great fanfare in that Indian state's commercial capital, Ahmedabad. Gujarati politicians talked up the state's peaceful business climate, efficient administration, and rapidly improving infrastructure, including three new ports, a natural gas terminal, and new highways. They laid out plans for special economic zones where foreign companies would receive tax abatements. They urged the 200-plus Indian and 50 foreign investors in attendance to take another look at Gujarat, arguing that it had come roaring back from last year's devastating earthquake. By the time the show ended three days later, Gujarat Chief Minister Narendra Modi was looking forward to large investments in IT, food processing, pharmaceuticals, and biotech.

Not three weeks later, it's as if the conference never happened. Starting on Feb. 27, riots pitting Hindus against Muslims erupted throughout Gujarat, killing more than 500 people and injuring many more. While the army has since brought a semblance of order to the state, business confidence has been badly battered. Work came to a halt on a 49-kilometer, $53 million express highway that South Korea's LG Engineering & Construction Corp. is building. The violence and looting have forced most factories and small shops to shut down. The government put the economic cost for the first week alone at $720 million.

And with scenes of mayhem filling television screens around the world, foreign companies are likely to delay their investment plans. The East Midlands Group, a British business association that sent a delegation of 19 to the conference, is still planning a second mission to Gujarat by yearend. But local business leaders are deeply worried that most investors will stay away. "Business needs tranquility, law, and order," says Sunil Parekh, president of the Gujarat chapter of the Confederation of Indian Industry. "Nobody is feeling good about being in Gujarat right now."

This is a serious blow for a state that is widely considered India's most progressive and is home to the nation's most commercially savvy people. In the wake of last year's earthquake, which cost $3 billion in destroyed assets and business, Gujarat worked hard to woo back industry with tax breaks and promises of less red tape. Last year, Gujarat attracted $3.5 billion in investment, or 19% of the national total, pushing past neighboring Maharashtra as the state with the most new investment. Most of the money came from Indian companies, which poured it into refineries, chemicals, and textiles. Gujarat, with 5.9% of India's population, accounts for 16% of its total exports, which include chemicals, diamonds, and textiles.

Now these industries are hurting, and none more so than the diamond-processing business, which last year exported $7.7 billion worth of stones. Industry analysts say riot-related work stoppages already have cost the trade an estimated $20 million. "If this disruption continues, we could lose up to $100 million by mid-March," says Sanjay Kothari, president of the Gem & Jewelry Export Promotion Council of India.

Officials are concerned that the unrest could set back Gujarat's ambitions of becoming a transportation hub for India's landlocked north. Also at risk: the special economic zone in Positra, which Indian Commerce Minister Murasoli Maran had planned to showcase as a "virtual foreign territory." It didn't help the state's international image when, on Mar. 2, a Hindu mob torched a truck carrying 65 cars from a General Motors Corp. factory in central Gujarat. The truck was owned by a Muslim-run company.

Inevitably, as Gujarat's crisis deepens, there will be comparisons with the 1993 Hindu-Muslim riots that erupted in Bombay after Hindu fundamentalists tore down a mosque in the northern city of Ayodhya. The outburst resulted in 800 deaths, provoked many Muslim entrepreneurs to pull up stakes, and tarnished Bombay's reputation as a commercial city. Some say it never fully recovered. And India's tech boom, which could have flourished in Bombay, blossomed instead in Bangalore. There, entrepreneurs of both religions are too busy inventing and innovating to succumb to sectarian strife--an example that Gujarat and the rest of India can't afford to ignore.

By Manjeet Kripalani in Bombay

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