Dec 5, 2008

Business - How risky is India ?

Mehul Srivastava & Nandini Lakshman

New Delhi/Mumbai - Until Nov. 26 the strongest force pushing India forward was a mix of good fundamentals and that intangible something that industry calls "sentiment." Forged in the years of 9% growth, this euphoria inspired Indians to economic greatness and lured outside investors eager to be part of the Indian miracle.

Then the shooting started in south Mumbai. The three horrendous days that followed laid bare the gaps between India's image and reality, sparking a nationwide introspection about the nation's future. The fear is that India's mounting problems could drag the country back to its pitiful past. Its governments, despite a manufactured public image, have always been unwieldy; its economy, despite the plenty of the boom years, is premised mostly on future potential; and its much-flaunted stability is no such thing.

India's fragility is revealed by a pattern of diffused violence—a bomb here, a killing there—that goes unnoticed even in India. Most outsiders (and most investors) don't realize how dangerous a place India can be. Since 1993, when 13 bomb blasts in one day killed 257 in Mumbai, just over 29,000 people have died in terrorist attacks, including insurgencies in Kashmir and the Northeast, according to a BusinessWeek analysis of data from the Home Affairs Ministry. Thousands more have died in anti-Muslim riots. At least another 4,500 have perished since 2002 in a Maoist rebellion that simmers, and sometimes boils over, in the mineral-rich region of Chattisgarh, where foreign companies plan to invest heavily.

Just after the Mumbai attacks, three people were killed in a train blast in Assam, a northeastern state that produces more than $2 billion worth of tea each year, most of it exported. "It is not just this one unprecedented attack in Mumbai," says Chandrajit Banerjee, director general of the Confederation of Indian Industry, India's most influential trade lobby. "Across the country we see...violence."

It's quite a contrast to the strengths India has used to attract global capital. Engineers and programmers are first class. Skilled, dedicated workers toil for wages much lower than in the West. The nation's blend of entrepreneurial spirit and democratic values has challenged the more rigid China model. A top-notch executive class boasts chief executives like Ratan Tata, chairman of the Tata Group and innovator in categories from autos to hotels. Tata owns the Taj Mahal Palace & Tower Hotel, which was ravaged in the attacks and which he vows to rebuild.

These strengths still attract investors. But foreign companies are not immune from the violence. In Orissa on the east coast, where billions in foreign investment lie tied up, Korean companies like steelmaker Posco have had executives kidnapped and land promised to them but never delivered: Protesters wield slogans and weapons to keep earthmovers at bay. In New Delhi, the Indian CEO of an Italian company's subsidiary was killed by a mob of employees angry over layoffs. And Patrick Cescau, CEO of consumer-products giant Unilever (UN), narrowly escaped death in the massacre at the Taj Mahal hotel where he was dining with colleagues.

If south Mumbai is visited by violence again, the 110-plus multinationals with regional offices there could be targets. Citigroup (C), Bank of America (BAC), ABN Amro, HSBC (HBC), Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM)—all have offices there. "The targets identified demonstrate that the intention is to create panic and shatter the confidence of investors in India and global investors coming to India," says Habil Khorakiwala, managing director of Indian drugmaker Wockhardt. The private equity arms of Morgan Stanley, and Englefield Capital, which have offices in the Oberoi Trident Hotel, are looking for new premises in the city, according to an investment banker.

No wonder Raghu Raman's phone has been ringing nonstop. An ex-Indian Army man, Raman is CEO of Mahindra Special Services Group, which offers security to blue-chip clients like Hindustan Unilever, Merrill Lynch (MER), ABN Amro, HSBC, and others, many of whom want to beef up their security. Prospective clients also want protection fast. Raman says some multinationals have temporarily flown their top expat execs out of India.

Indian executives are even more alarmed than the multinationals. "We virtually handed Mumbai on a platter to the terrorists," says Rahul Mehta, managing director of Creative Group, a textile exporter in Mumbai that supplies clients such as J.C. Penney (JCP) and Target (TGT). Referring to reports that intelligence agencies had predicted an attack, he adds, "[The government] was forewarned, so why didn't they act on it? We've been ravaged by terror attacks since 1993."

In Mumbai, anger courses through the city. "How can I invest more in a city which does not protect me?" asks Abhay Mansukhani, who makes auto parts. Now he's tempted to relocate: He's holding off expanding his plant in north Mumbai as he contemplates a shift to Pune, 124 miles away.

Some executives, undeterred, are staying put. Gautam Patel, managing partner of Battery Ventures, was on a conference call when his window shattered from an explosion outside the Oberoi. He's furious with the government, but he's not budging: "Let's do something to get Bombay back on its feet," he says.

What concerns managers like Patel and Mansukhani is that the government they depend on for so much is so weak. The attacks of the past two years have made Prime Minister Manmohan Singh's administration appear incompetent. Inflation has eaten away at the meager gains of the poor, who in India vote far more reliably than the middle class. Promised reforms have either been checked by the necessities of coalition politics or stalled in the Kafkaesque bureaucracy called the Indian Administrative Service, which pretty much runs the country.

And the tentacles of the global credit crunch have spread into India's relatively well-capitalized banks, slowing economic growth to 7.6% this quarter from more than 9% earlier. Exports dropped 12.1% in October, vs. a 51% jump in the same month last year. "It's a crisis situation," says Ananthasubramaniam Prasanna, chief economist at brokerage ICICI Securities. But he adds: "The focus now is on internal security and not fiscal policy." Worse, the prospect of a national election in April has reduced the government to lame-duck status.

Singh's government has promised swift action. At least three senior ministers, including one in charge of security, have quit. Singh has suggested creating a new agency that could react swiftly to an attack and increasing funds for commandoes.

Yet if a conflict with Pakistan ensues, or bombings continue, or economic reforms remain frozen, or a government collapses—all things that have happened to India in the past 10 years—the euphoria could dissipate completely. "Fear of physical danger to employees, executives, and property can muddy the sentiment toward India," says Gunjan Bagla, author of Doing Business in 21st Century India and a consultant to U.S. companies in India. "To me the tipping point would be if foreign executives start to believe that the government is not willing to make changes to correct its inabilities."

Because India's economy is still a pidgin blend of Soviet-inspired socialism and entrepreneur-driven capitalism, business needs government to create a climate where investments can take root. In southern India, especially in Bangalore, strong governance and education helped create the $64 billion outsourcing industry almost entirely from scratch. On Dec. 2, Subramaniam Ramadorai, chief executive of Tata Consultancy Services, the top tech services outfit in India, left work to join a candlelight service for Mumbai's dead. Then it was back to business-almost-as-usual. "Our customers say they stand by us," he says. "Nobody has said they want to do less in India."

But in the northern states of Bihar and Uttar Pradesh, nearly 500 million people endure in an economic wasteland created by political turmoil, extreme corruption, India's highest crime rate, and its lowest per-capita income. Industry, local and foreign, has fled those states, or never dared venture there. Economic growth is less than half the national average. The people are among India's most illiterate, with a life expectancy worse than that of sub-Saharan Africans.

Not long ago, almost all of India resembled these two states. Even when reforms opened up much of the economy in 1991, real, measurable growth was held back for years as coalition governments collapsed, a border conflict with Pakistan threatened to spread, and scandals eroded faith in the financial markets. Only in 2001, when a stable government focused on the economy with a brand message called "India Shining," did things take off.

Which India will prevail—the India that nurtures global industries and rising affluence or the India of stalled hopes and endemic violence? A year ago the answer was clear: The new India would win. That is probably still true, but India now faces a struggle

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