Why Bombay Has The Blues

The city is such a mess that investors are fleeing. Can it be revived?

Susir Kumar, Chief Executive of Intelenet Global Services, a back-office outsourcing company in Bombay, says it almost always happens. Whenever a new client from the U.S. or Europe arrives to visit Intelenet's sparkling, modern offices, they are appalled at what they have to go through to get there. Bombay's narrow, potholed roads are jammed to a standstill with choking traffic, and lined on both sides with squalid slums. Kumar spends a lot of time explaining to customers that bad roads don't mean telephone lines don't work, and that open sewers in the slums don't mean call center staff are at risk of disease. Still, he sees the impact of the noise and crowding, and worries. "I wish government officials would travel with us and experience the reaction of foreigners to Bombay's infrastructure," he says.

Bombay, India's longtime business capital and pulsating melting pot, is in trouble. Once the jewel of the British Raj, the city of 14 million people is now an overwhelming conglomeration of dismal slums, congested roads, crowded public transportation, overtaxed businesses, and decaying residential and commercial buildings. As a result, investors are increasingly turning away from Bombay and heading south to more welcoming Madras, and even east to communist-run Calcutta, to set up businesses. Bombay's gross domestic product is growing at an annual rate of 2.4% -- a third of India's overall rate of 7%. "No new industry wants to come here, no one wants to live here," laments Deepak Parekh, chairman of Housing Development Finance Corp., India's premier housing-mortgage firm, who also sits on committees pledged to the city's renewal.

Some see the decline accelerating. As recently as 2002, Bombay was second only to Bangalore in the amount of new tech investment it attracted. Now, according to Nasscom, India's software industry association, it ranks third after the capital city of New Delhi, which has been building infrastructure to accommodate new business.

What's Bombay's problem? Politics, according to its boosters. They say that state and federal politicians have repeatedly broken promises to fix the city's overtaxed infrastructure, raze and rebuild its slums -- where 55% of the population live -- and otherwise make the city attractive to investors. At the same time, Bombay tax revenue has gone to projects that do nothing to help the city. "Bombay is their moneybag,"says Parekh.

According to a September, 2003, report by McKinsey & Co. and Bombay First, a citizen's initiative, Bombay residents and businesses generate an estimated $10 billion in taxes, or 20% of India's overall tax revenue. But the government annually reinvests just $220 million of that money in improvements in city infrastructure, according to the study. After years of neglect, combined with helter-skelter growth, Bombay is falling apart. Its suburban train service carries 6 million passengers a day, which works out to 570 per train car, nearly three times their capacity. "Commuting by train has become inhuman for my employees," laments Cyrus Guzder, chief executive of international cargo carrier AFL Pvt. Ltd. Six million of the poorest Bombayites survive without running water or sewage facilities, and with inadequate health care and schools.

The irony is that despite conditions that chase away new investment, Bombay remains the most costly place to do business in India. Office space is among the priciest in the world, with average rents of $18 a square foot, according to international realtors Knight Frank. That's partly because local laws passed decades ago to provide housing for the poor have had the effect of keeping much land from being developed, and as a result property prices are astronomically high. Even businesses that want to stay in the city can't afford to. Sandeep Tandon, whose Celetronix India Pvt. Ltd. is a contract manufacturer of PC memory modules for multinationals like Dell Inc. (DELL ) and Apple Computer Inc. (AAPL ), needs an additional 1 million square feet of space. But Bombay is too expensive, so he's looking elsewhere.

Can anyone fix Bombay? In mid-October a Congress Party coalition was re-elected to head the state of Maharashtra, which controls most city operations. A new chief minister has not yet been appointed, but 63-year-old Sharad Pawar, India's Agriculture Minister and a leader of the coalition, vows to repair the city. "In two years, Bombay will be renewed," Pawar says. His plan includes new highways, a renovated port and airport, increased public transport, and new housing for the poor. In a meeting with Bombay's concerned businesspeople on Oct. 6, Indian Prime Minister Manmohan Singh pledged additional resources to the city and declared his "personal interest that Bombay's infrastructure will be brought up to date."

There are skeptics galore. "We get a lot of promises," says businessman Tandon. Others note, however, that it is now or never. If current trends continue, says Shirish Sankhe, the author of the McKinsey report, by 2020 Bombay's population will hit 28.5 million, its infrastructure and services will be in total disarray, and the city "will become decrepit, with a growth rate of less than 1%." Every passing day without reform makes that possibility look more real.

By Manjeet Kripalani in Bombay

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