India talks up potential but investors head for the exits | South China Morning Post
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India talks up potential but investors head for the exits

Gap between New Delhi's hype and harsh reality for foreign firms shows need for true reform

PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Thursday, 25 July, 2013, 3:57am

India has long been viewed as a value investor's dream: rapid growth, 1.2 billion people pining for a taste of globalisation, and underdeveloped industries ripe for turnarounds. So it surprised few when the genre's guru, Warren Buffett, placed a bet on the world's ninth-biggest economy.

What did come as a surprise, though, was last week's decision by the billionaire's Berkshire Hathaway to give up on India's insurance market after just two years. Adding to the drama, the withdrawal came the same week India unveiled plans to open the economy as never before to foreign direct investment.

Buffett isn't alone in voting with his feet. Wal-Mart Stores, ArcelorMittal and Posco are pulling back on investments in India that they had announced with great fanfare. What's scaring foreigners away? A rampant political dysfunction that has stopped India's progress cold.

Headwinds from New Delhi are contributing to the slowest growth rates in a decade, a record current account deficit and a 7.9 per cent plunge in the rupee this year. Fiscal neglect has bond traders demanding higher yields for government debt than India wants to pay. But the most devastating no-confidence vote is coming from the big, long-term money India needs to boost its competitiveness. Foreign direct investment slid about 21 per cent last fiscal year.

In theory, no Western executive or investor can ignore the vast potential of Indian consumers, 29 per cent of whom are under age 15.

The problem is an Indian government that won't get out of its own way. The long debate over foreign investment limits says it all. In September last year, Prime Minister Dr Manmohan Singh's government passed a law allowing big retailers to open stores directly in India, yet no one has. Reasons are legion: too many prerequisites; constraints on whom goods can be purchased from; a raft of regulations limiting franchise models and factory construction; and the hair-pulling need to negotiate separately with each of India's 28 states.

India has fallen into a self-destructive pattern of relenting on the big issues, then killing would-be investors with the details. Take the experience of Swedish furniture retailer Ikea, which in January won approval to open outlets in India. Not content with the Swedish icon investing about US$2 billion, the government played hardball. It tried to bar Ikea from selling food in its stores; Ikea stood its ground. But the damage was done.

A rampant political dysfunction has stopped India's progress cold

Executives fully expect to have to navigate India's notoriously bad infrastructure, rigid and often unskilled labour markets, red tape and official corruption. They're less keen on tripping over the fine print of vaguely written laws and local power brokers with agendas at odds with New Delhi. Headline-making disputes involving household names like Ikea don't help India's image.

Worse, the uncertainty is breeding a huge trust deficit. On July 17, India moved to open important sectors such as defence, power and telecommunications to foreign investment. It's being heralded as the nation's "big bang". Big fizzle is more like it, as big inflows are likely to continue eluding India.

Any major foreign investor cannot ignore the experience of Vodafone Group, which is still wondering if it will take a multibillion-dollar loss on a deal thanks to tax-policy changes. In 2007, the England-based carrier bought the Indian unit of Hutchison Whampoa. Since then, a retroactive clause placed in the nation's laws have thrown the deal into chaos, creating a US$2.2 billion tax dispute, delaying an initial public offering and further denting India's reputation.

The lack of transparency and reliability makes it virtually impossible to consider long-term investments in India. And even if a foreign executive has faith in the sober-minded Singh, there's no guarantee his ruling Congress party will be in power after elections next May.

What should India do? Pass clear and strong investment laws that will survive the change of government and offer a code of conduct for state leaders. India must strengthen the rule of law as it applies to foreigners so they'll trust their money is safe. Finally, India must think long term. Today's motivation for inviting more foreign money is to narrow the current account deficit. The goal should be to raise competitiveness, gain fresh knowledge and create better-paying jobs.

India is proving that size doesn't guarantee its inevitable rise. Only true economic reform, political openness and more proactive leadership will do that - and get the Buffetts of the world to come to India and stay.

Bloomberg 

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