May 25, 2020
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FDI: From Flip To Flop

Global investors are asking, 'If the Tatas couldn't get through, what chance do we stand?'

FDI: From Flip To Flop
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GLOBAL business is not merely kvetchy about New Delhi, it's starting to show signs that it might be losing patience with the indecisiveness of the latter's polcies and the protectionist prattle of the Indian business classes toward western investments in India. And the recent incident of the house of Tatas throwing in the towel over a prestigious and expensive air -line project with a Singaporean tie-up is no mean reason behind the latest distress.

That's the most stunning and recent example being frequently cited by several Wall Street analysts and executives in US and British corporations. Their usual cynical comment on economic and business prospects in India is: "If the Tatas can't get their project approved, what chance in the world do we have?"

The decision by Ratan Tata to abandon his airline project in the face of government indecision comes at an awkward moment. Just as foreign investment in the Mumbai market is picking up substantially, and just when direct investment too is beginning to come in after long pauses, one of Indian industry's most durable names announced a retreat for the reason that has more than any other kept investment away—government delays.

Said one disappointed Wall Street analyst: "What's the use of (finance minister) Yashwant Sinha talking to us here about how India beckons us? Or of former finance secretary Montek Singh Ahluwalia speaking about his government's policies? We listened to them and their promises and look at what we see—that Tatas and their overseas partners are given the boot. I clearly see politics behind it and it seems to me that transparency, which the BJP promised, has been tossed out of the window."

 Luckily for India, airlines is one area where international business is inclined to be a little forgiving of government controls. As a result, the government's delay in allowing the launch of a new airline has not been quite the blow that it would have been if the Tatas were refused, say, a power project. Still, the Indian government has reason enough to be a little embarrassed over what a London investment banker called its "manner of indecision". The trouble, he told Outlook, is "sometimes not what decision the government takes, but that it doesn't take a decision at all."

The government, he said, could well have taken a prompt decision against foreign partnership in Indian air travel. Now, he said, even companies sympathetic to nationalism in the airline business are worried about the way India does business—or doesn't. "There are two issues we are talking about here," the investment manager added. "There is a broad message here that is unacceptable, and a more industry-specific message that is more acceptable."

 Says a banker with an American multinational company: "The point of this dispute has been that Tata has been talking the very language that foreign companies use." This is the language of companies that proposed many infrastructure projects earlier. "As things stand, no new infrastructure projects are going in," he said. "The sanctions aren't helping, and if foreign companies hear Tata talking the language of foreign companies over bureaucratic hurdles, that cannot help either."

A senior executive with a US firm eyeing India as a destination is worried. He asked: "Tell me, what hope is there for those of us who aren't as well connected as the Tatas in India? I'm very unsure about India now. Is it the right place to get in now or should I wait? Five months ago (when the Vajpayee administration assumed office) I was all charged up. Then came the Budget and its undoing piece by piece. The whole thing now is unpredictable, it seems. I think I'll wait and see what prime minister Vajpayee has to say when he comes to New York (later this month)."

Clearly, such concerns will be under sharp focus when a 10-member delegation of the United States-India Business Council (USIBC), which is also represented by Fortune 500 firms, meet with senior members of the Indian political leadership on September 17 and 18. The delegation, led by Dean O'Hare, the Chubb (insurance) Corporation boss, and including Frank Wisner, former American envoy to India and now a top official with AIG Inc, will seek to press policy-makers in New Delhi to be realistic and pragmatic in their approach toward attracting US investments to India.

One of them put it rather bluntly: "In the end, foreign investment is all about trust. We are badly stuck on the trust question. The general mood in our investment community is one of rather great frustration and disappointment tinged with anger at what is happening in India." He added: "What's good for Indian companies is good for India seems to be the governing logic at the moment. The rules of the game seem stacked against those of us who want to invest in India. I'm not talking about the tough negotiating that the Indians engage in. It's the constant changes and shifts that occur after the negotiations are seemingly done and over with that is upsetting."

What the US firms seek are fairly simple: that the general policy framework on investments be connected to the marketplace, transparency and equal application of the rules of law. "Right now, it isn't so. It seems that those who can manipulate the system alone can succeed." "For God's sake, we are not the East India Company," another analyst added. "Foreign investment, it appears, is still a dirty word in India (seen as) some sort of a Fifth column trying to destroy India." As long as there was political manipulation, lack of salutary shifts in policies, or a real strategy for FDI, adequate consultations and predictability, "there's going to be a disquiet among those who want to put their money in India."

Managers with British companies promoting investment into India see the indecision linked to an alliance with Singapore Airlines, an alliance that had been replaced, according to Tata, with an equity participation by a Singapore company. In its final shape, Tata had proposed a Tata airline; that it would get equity participation from a source in Singapore was different from letting Singapore Airlines join in a domestic Indian service. That's a fine distinction that managers who finance projects here are not drawing. The government seems to have the benefit of doubt here—just about—that its indecision arose from resistance to a domestic airline with foreign partnership, and not from compulsively indecisive ways.  That reputation hangs heavy, but some small moves point to new possibilities.

Last year British investment worth $1.2 billion to India was approved. Much of it has not yet come in, but Indian officials pushing British investment point out that approvals, which is about the same as last year's, is not the issue. Trade between India and Britain reached a record high of over $5 billion last year, mostly on the strength of liberalised decisions that have stayed.

Actual investment from Britain is also beginning to trickle in a little quicker than before. The inflow was $124 million last year, peanuts in comparison to the total investment abroad by British companies, but more than twice the actual figures for 1995 and 1996.

India watchers in corporate America and Wall Street do acknowledge the recent 'positive steps' taken by Vajpayee in naming two economics-oriented brains trusts. "These moves have raised our hopes," one executive said. However, "what's really missing is a kind of an authoritative doctrinal statement on the role of FDI in India's economic development strategy, saying that FDI will be an integral part of the strategy. A recognition that there is a core link between trade, investment and growth. We need a clear statement that ties up all these. In effect, we are looking for a Vajpayee Doctrine."

 "The government will have to give in," says a London banker. "The stubborn way of handling things will not work in the long run." But, he conceded, it was understandable for a government to want control of the aviation industry. "Apart from America, most governments, even in the West, don't like internal airlines going into foreign hands." Only the US has at the moment a crowd of airlines that are privately owned, and American Airlines partners British Airways on many operations.

But with assurances of control in the hands of Tata, "the government will have to take a fresh look, have to give in," he adds. "They cannot deny the service to one of the top groups for long." But with many major proposals in power and infrastructure also held up, the Tata story has only refocused the spotlight on an old government malaise.

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