Wednesday, June 17, 2009

Foreign companies eye India with cautious optimism

At first, last month's clear victory of India's ruling Congress party raised hopes that the doors to Asia's third-largest economy would be thrown open to foreign investment. The stock market surged on euphoria that with reform-minded leadership firmly in place, Bank of America branches and Wal-Marts would quickly take root across the land.

Now, reality is setting in.

Foreign companies are waiting to see how much the new government will open India _ where key sectors like retail and finance are protected _ to the tough embrace of globalization. Even those bullish on the country's future say if further liberalization comes, it will come Indian style _ which is to say, slowly.

Last week, Swedish retailer Ikea said it broke off talks with the government about setting up shop in India. Ikea wants to retain full ownership of its stores, which isn't possible under current law.

«As soon as the legislation changes we would love to enter the Indian market,» said spokeswoman Charlotte Lindgren.

If the Indian government decides to raise the cap on foreign investment in insurance companies, MetLife International would definitely invest more in India, says Rajesh Relan, the company's managing director for India.

«MetLife is keen to increase its stake,» he said. «India is a growth engine for the future.

India's new government has voiced its support, in principle, for opening banks, insurance companies, and pension funds to greater foreign investment. Many also hope controversial legislation to give foreign corporations greater access to the nation's $430 billion retail market will pass now that once-powerful Communist parties have been sidelined.

U.S. businesses have been encouraged by the return to office of Prime Minister Manmohan Singh, who pushed through a nuclear deal with the U.S., opening the way for greater economic cooperation in sensitive areas like defense and nuclear energy.
But the forces behind India's decades-old philosophy of «swadeshi,» or economic self-sufficiency, didn't all vanish with the election.

Eighteen years after India began to shift toward greater economic openness, important swaths of the economy remain dominated by the state. The nation's bureaucracy is as entrenched as ever, and many remain skeptical of globalization _ especially after witnessing the havoc of the U.S.-spawned credit crisis.

«We think we can be partners with India in its growth going forward, but that depends on India's policies and its continued reform process,» said Karan Bhatia, GE's vice president for international law and policy and former deputy U.S. trade representative for Asia.

The election «provides political capital to economic reformers within the Congress party,» Bhatia added. «I leave it up to them how fast they want to move with it.

India's new administration wants to spur growth, but it's unclear what role foreign firms will play. The Congress party's victory was rooted in a delicate balance of populism and free marketeering, and its two largest coalition partners _ the Trinamool Congress and the Dravida Munnetra Kazhagam _ have voiced their opposition to some aspects of liberalization.

Economist Saumitra Chaudhuri, newly appointed to a top government advisory body, said the drop in foreign capital flows due to the global downturn has restrained India's growth. But, he cautioned, «It doesn't follow that if you just relax every norm on foreign investment we'll get high growth.

«Eighty to 90 percent of our problems are homegrown,» he added, citing inadequate power and roads.

Advocates say increasing foreign participation in banking and finance would deepen the pool of long-term investment in infrastructure, boosting growth without adding to the already onerous fiscal deficit.

But the government has other options for financing growth, like selling chunks of state enterprises or continued deficit spending.
Opening the retail sector remains contentious. Many fear allowing companies like Wal-Mart unfettered access would ruin millions of family-run shops.

Foreign retailers can run wholesale outlets _ Wal-Mart Stores Inc., with Bharti Enterprises, opened its first on May 30 _ but can't open direct-to-consumer shops that sell more than one brand.

A Wal-Mart spokeswoman in India declined comment on what the election portends, saying the government's directives on foreign retailing have been «vague.

U.S. companies are also hoping to get a piece of the $30 billion India is expected to spend on military procurement in the next five years.

A thicket of details have to be worked out, but the U.S.-India nuclear deal signed last year, which overturned a three-decade ban on atomic trade, could make it easier for the two nations _ once on opposite sides of the Cold War divide _ to share sensitive technologies.

«We're putting a lot of faith in future business in India,» said Ronald Smith, general manager of ITT Corp.'s defense liaison office in New Delhi. «We're seeing a shift from the traditional suppliers of the past, the Soviet Union and the Israelis, possibly toward U.S. technology.

Most executives now say they're hoping for a slow shift to a more efficient business environment, rather than big-bang reforms.

«When you form a coalition government, you're cutting a lot of deals in the back room,» said Devesh Garg, who oversees $500 million in India investments for Bessemer Venture Partners. «There are often times when purposefully there is not clarity provided by the government on what is required to get something done.

«That's going to take lifetimes to change,» he said. But hopefully, he added, «there will be less gridlock.