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India Shakes Off Its Shackles


International Business: India

INDIA SHAKES OFF ITS SHACKLES

Old portraits of Marx, Lenin, and Stalin are common on the streets in India's lush southern state of Kerala, once a Communist Party stronghold. Yet as India moves away from decades of socialist planning toward more market-oriented capitalism, the pictures are fading from neglect--and Kerala's business scene is brightening. "Industries are popping up all over the place," says M.C. Mycle, branch manager of state-owned Canara Bank in the Kerala city of Ernakulam, as he sips tea with local businessmen in his office. "Money is really flowing now."

For foreigners and locals alike, the business climate in India is looking up. After nearly four years of market reforms, Prime Minister P.V. Narasimha Rao's policies are starting to pay off: Industrial output is rising at an 8% annual clip, economic growth is likely to hit 7% this year, and foreign investment is expected to rise sharply.

At a time when Western investors are skittish about emerging markets, India still looks attractive. Unlike Mexico or China, it has a full-throated democracy that should make it more stable as it faces the challenges of reform. And unlike Asian countries with overheated economies, India's growth has been more moderate. "India is just now on the upside of its cycle, while every East Asian country is at the top or beyond," says Jim Rohwer, chief economist for Asia at CS First Boston.

India could even begin to gain ground against rival China. While dozens of major power projects in China have recently been stalled by Beijing bureaucrats, India is about to close deals worth $5 billion for eight privately financed power plants. "A year ago, U.S. companies were all over China," says U.S. Assistant Energy Secretary Susan F. Tierney, who has made several trips to India to advise New Delhi on its new power plants. "Now the momentum has shifted to India."

That was clear during Commerce Secretary Ronald H. Brown's mid-January trip. Chief executives from 25 companies accompanied Brown to three Indian cities. Contracts and tentative deals worth more than $4 billion were announced. Among the biggest projects, California's Mission Energy Co. signed an agreement with Tata Group, one of India's largest industrial concerns, for a $400 million power plant. U S West Inc. announced a $100 million investment to provide a pilot project for India's first privately operated telecommunications service.

Overall, nearly one-third of the $7 billion in direct foreign investment approved since 1991 has been from U.S.-based multinationals such as General Electric, Wrigley, and Kellogg. Companies such as Ford Motor Co. and American International Group Inc., which haven't yet cracked this market of 900 million people, are banging on the doors.

Not surprisingly, India is starting to loom larger for U.S. policymakers after decades of icy relations. A few weeks before Brown's trip, Defense Secretary William J. Perry was in New Delhi to sign a historic military-cooperation pact, including joint training and collaboration on weapons production.

The U.S. attention is coming even though Rao is facing one of the worst political fights of his tenure. In local elections in December, populist critics of reforms dealt a stunning defeat to his party in state elections. Rao may fall from power if his party fares no better in state elections coming up in February and March. With that in mind, Rao's government is likely to pull back on a handful of the reforms that are most threatening to farmers and workers (table).

But confidence is high among many Indian executives that the fundamentals of Rao's free-market push will remain intact--no matter who is in power. "The reforms have become institutionalized," maintains Urjit R. Patel, the International Monetary Fund's India representative.

CHIPS AND CHOCOLATE. Evidence of the government's new, open attitude can be seen throughout the country. Delivery trucks loaded with once banned foreign products such as Ruffles potato chips and Nestle Crunch bars rumble over potholed highways across the subcontinent. Advertisements for AT&T's "communications solutions" are plastered on New Delhi streets, signs of upcoming liberalization in the telecom industry. And some 280 foreign institutions have crowded into India's financial industry, which had been closed to outsiders before 1992.

To be sure, there are limits on how far foreign investors can go. Bureaucrats are still reluctant to allow foreigners 100% equity. Some projects approved in New Delhi bog down at the state level, "where you still have to go through the same old socialist rigmarole," says Subramaniam Swamy, chairman of India's Commission on Labor Standards & International Trade.

Nevertheless, the contrast with the old days is stark. Prior to 1991, getting a project through the bureaucracy "was like peeling an onion," recalls Suresh C. Rajpal, president of Hewlett-Packard India Ltd. "With every layer you peeled, your eyes watered." Now, clearing components through customs takes two days instead of three weeks. Under the old system, derisively dubbed the License Raj, Indian companies waited months for government approval of routine business such as expanding production or hiring a director. Diversifying into a new product could take years. Now, family-dominated empires such as the Tata, Birla, and Godgrej groups are restructuring, finding foreign partners, and devising export strategies.

One of the biggest obstacles to India's economic takeoff remains its backward infrastructure. The country has just 9 million phone lines--one for every 100 people--and has one of the world's lowest per-capita consumption rates of electricity. The government is responding by opening its telecom and power sectors to private investors. On Jan. 16, India invited bids for franchises to offer cellular and basic telephone services. Already, AT&T, U S West, and British Telecommunications have each formed ventures with local partners. In the deal announced during Brown's trip, U S West said it would install a phone system serving 40,000 customers.

In power, India needs to raise some $200 billion to meet its goal of adding 142,000 megawatts of capacity over the next 15 years. Financing has already been lined up for the first three plants, all involving U.S. companies. The projects include a $920 million plant by Enron Inc.

MOMENTUM. As it attempts to catch up with East Asia, India's challenge is to balance its reforms against the tremendous needs of India's impoverished millions. Most analysts agree that while Rao's government has done a good job selling its policies to foreign investors and India's business elite, it has failed to explain what's in it for farmers, workers, and the poor. To head off unrest, the new budget to be unveiled in mid-February by Finance Minister Manhohan Singh is expected to boost subsidies for agriculture, increase pension payments, and provide more aid to the unemployed. The budget deficit is likely to grow from around 4.5% of gross domestic product to more than 6%.

With $20 billion in foreign exchange reserves, vs. $1 billion in 1991, India can afford a little social spending. And few in India believe there will be much backsliding if Rao's party loses power. Even his top foes don't talk about bringing back the License Raj. The opposition Bharatiya Janata Party, for instance, distrusts foreign consumer-goods companies such as Coca-Cola Co. but has long advocated a greater role for the private sector. That's why even though there may be fits and starts, the momentum of India's reforms will continue to push the world's second-largest country into the global economy.

ALTHOUGH SOME REFORMS WILL STAY ON HOLD...THE HEART OF THE PROGRAM IS ON TRACK

-- Reforming labor laws that make it extremely difficult to lay off workers

-- Privatizing money-losing state-owned enterprises in transportation and financial services

-- Eliminating subsidies for commodities such as rice, wheat, and corn

-- Allowing 100% foreign ownership of companies in consumer goods, telecoms, and autos

-- Opening power and telecommunications projects to foreigners

-- Speeding approval of manufacturing investments by foreign and domestic investors

-- Reducing import barriers on everything from garments to computers

-- Allowing private sector to compete with national monopolies in railroads and postal servicesBy Sharon Moshavi and Pete Engardio in New Delhi, with Shekhar Hattangadi in Bombay, Dave Lindorff in Hong Kong, and bureau reports


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