India's Strife Slows Foreign Investment

A BANKER from Britain came to India last month looking for investment opportunities. On the final day of his trip, March 12, he narrowly escaped being killed by a terrorist bomb that exploded at the Bombay Stock Exchange. He drove to an airline office and, shortly after leaving that building, another bomb went off. On his way to the airport, two more bombs exploded along his route.

For decades, foreign investors had one key worry about India: whether the government would let them in. Now India is rolling out the welcome mat at a time when foreign investors have plenty of things to worry about, including political instability, violent communal riots, rising Hindu fundamentalism and, as the banker discovered, the threat of terrorist bombings.

These troubles could hurt India's chances to advance after four decades of economic xenophobia. Foreign investment is a key part of the government's effort to open up and modernize the economy. And the country has lots of catching up to do.

"The total amount of foreign investment we've gotten since 1947 is less than what Indonesia gets in one year - and far less than what China gets," says Ajit Dayal, a Bombay-based investment analyst. According to the India Investment Center, foreign investment approved from 1981 to 1990 was Rs. 12.7 billion, a paltry $410 million.

India's ambivalence to foreign investment is deep-rooted and bound in a skein of cultural and political threads. Since independence in 1947, India has been wary of the outside world. Partly, this was a lingering fear of colonialism: It was through foreign trade and investment that Britain and other European powers colonized India. Partly, it was a desire for economic self-sufficiency. India has never experienced the rapid modernization East Asian countries are undergoing.

In addition, India chose a planned, quasi-socialist economic system that allowed the government to micromanage industry through Draconian controls. The government owned major industrial sectors, including power generation, insurance and, since 1969, banking. Industrialists were told what to produce, the quantities, and the prices. This served both to conserve resources and to curb the profits made by the private sector.

Foreign investments were encouraged only in export and high-tech industries. In 1977, IBM and Coca-Cola were forced to leave India, which scared away foreign investors for years.

Things started to change in 1984, when former Prime Minister Rajiv Gandhi liberalized industrial licensing. The current government of Prime Minister P. V. Narasimha Rao has gone much further, pressured by the International Monetary Fund.

For foreign investors, the policy changes have all been good. The rupee was made fully convertible in February. Import tariffs are being steadily reduced. Duties on imported capital goods and industrial components have been slashed to boost investment in such sectors as power generation.

In 1991, foreigners were given permission to own 51 percent of Indian companies and last September the government opened India's 20 stock exchanges to foreign investors.

After years of delay - and a major stock exchange scandal last summer - the government is giving muscle to a stock market regulatory agency based on the United States Securities and Exchange Commission, which should bring some discipline to the Indian markets.

As a result, two Hong Kong-based stockbroking firms established India offices in the past year. Merchant bankers and fund managers are pouring into Bombay, searching for investment opportunities.

In September, the British news service Reuters expanded its Bombay bureau to boost business reporting. In 1991 and 1992 the government approved foreign investment proposals worth $2.26 billion.

But at the same time, India has started a downward spiral into instability. "Since I came to Bombay in September," says Jeremy Clift, Reuter's new Bombay bureau chief, "I've mostly covered riots and bomb blasts."

Throughout India Hindu-Muslim clashes have killed more than 1,700 since December. Bombay, the country's business capital, has been particularly hard hit: 700 were killed in communal clashes and, in March, the city was rocked by a series of bombs that killed 300.

Foreign investors are scared and much of the investment approved by the government will probably be held back. Last month, Mr. Rao announced that foreign investment in India had been cut in half thanks to the troubles since December.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK