INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Business Commentary/Jay Dubashi

Three reasons why investors don't fancy India anymore

A year after it came to power, the Vajpayee government has still not been able to get its act together. Even after two Budgets, the government seems to have made little impact on the economy.

All that the last month's Budget has done is to activate the stock market, or rather the speculators in the market, as Budgets always do. But the hype is generally short-lived and leaves no trace after it is all over.

What is even more surprising is that the Budget has made no impression on investors, foreign as well as Indian. In fact, foreign investors are withdrawing from India. The latest to join the exit list is Lehman Brothers, a leading American investment bank, which has decided to wind up business in India.

It is the third or fourth major foreign financial institution to do so, after J P Morgan, a prominent bank from Wall Street, and Peregrine, a portfolio fund manager from Hong Kong. A number of other foreign financial agencies which used to be active until a few months ago, have curtailed their operations and laid off staff, though they say they are not pulling out.

Following in Lehman's footsteps last week was Swisscom AG, a Zurich-based telecom company, which is also getting out of India. It is said to have lost nearly half a billion dollars in telecom operations in Asia, including India. In India alone, its losses so far amount to nearly Rs 3 billion so far.

Why are foreign companies leaving when the government is so upbeat on the economy? According to private estimates, GDP growth in 1999 may be only around 5 per cent, not 7 per cent as the government believes. Industrial growth may be much less than 8 per cent, government's own estimate.

It is not only foreigners who are unimpressed by the Budget, but the Indian investors too. Project after project is being shelved across the country. The Tatas decided to shelve their major greenfield steel project in Orissa last year. So did Larsen & Toubro, which operates a big steel machinery making company, which had been making plans for its own greenfield steel plant like Tatas', also in Orissa.

The Birlas had been preparing for an alumina project, also in Orissa, which is also out. These three projects together would have cost around Rs 300 billion. They are unlikely to be revived in the near future, along with a tyre plant that Apollo Tyres was planning to set up in Gujarat.

There are three reasons why foreign investors do not fancy India any more, at least for the present. First, the size of the Indian market, which means essentially the Indian middle class, is not as big as they had been led to think. It is a very shallow market which simply cannot absorb the kind of investments foreign companies are used to dealing with.

Second, the reforms have come to a dead end. The red tape is as red as ever, for the bureaucracy is well entrenched in the Indian system and has not taken kindly to reforms. And in the absence of political will, things will not change in the near future.

Third reason, of course, is uncertainty at the political level. Vajpayee is a nice man but he simply cannot get his party or his partners to play along. He is also pursuing or seems to be pursuing an agenda for which there is little support in his own party, like, for instance, the opening up of the insurance sector to foreign companies. It is impossible in a democracy for a government to go very far, without grassroots support from its own party.

Will things change in the near future? It's most unlikely, unless there is a sea-change in the situation, particularly at the political level. The Indian industry is holding itself aloof, for it does not really trust the administration. That is why, there have been no major investments in industry in the last three years. And it is the lack of investments that is responsible for the current downturn in the economy.

The stock market will soon cool down, though some shares will always keep going up. But without a sustained tempo of investment, there can be no great pick-up in economic activity in the long term.

Jay Dubashi

Rediff columnists on Budget 1999-2000

Business news