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Wall Street Journal and Dow Jones Newswires in Chinese

November 27, 2000

Reforms in India Are Tantalizing,
But Debates Cool Investor Ardor
By DANNY PEARL
Staff Reporter of THE WALL STREET JOURNAL
NEW DELHI, India -- The tumblers of economic reform have slowly but surely
been turning in India over the past decade, each click resonating through
this nation of a billion people. Lately the prospect of unlocking its markets
has seemed a bit brighter -- but not bright enough to impress foreign
investors.
Every day, India's financial pages are filled with news of a new opening: a
plan to sell the government's stake in a big car company, the lifting of
controls on the textile industry. But the fine print tells another story:
stubborn hurdles to foreign investment, insistence on public control and open
battles among ministers that could force Prime Minister Atal Bihari Vajpayee
to protect his diverse coalition government rather than take fresh economic
gambles.
"The debate over reforms will be endless unless there is a crisis, and there
is no crisis around the corner," says Mahesh Vyas, executive director of the
Centre for Monitoring the Indian Economy, a private organization. India is
still coasting along with economic growth above 6% a year.

Still, there are some worrisome signs. Last month, Standard & Poor's lowered
its outlook on the Indian rupee because of the darker prospects for economic
reform. Foreign investment, already a pittance compared with the rest of
Asia, has slackened recently, and a few big companies, including Enron Corp.
of Houston and British Telecommunications PLC, are freezing some India
investments as their focus shifts to more-developed markets. Just 14% of the
multinational-company executives recently surveyed by AT Kearney said they
were more likely to invest in India than in China; 56% said the reverse.
Even critics think Mr. Vajpayee's nationalist Bharatiya Janata Party, which
one year ago won a mandate to lead its second coalition government, is
sincere about pushing for further opening of India's statist economy. But
what government officials call the second generation of reforms -- India's
Congress Party launched the first in the early 1990s to allow more private
enterprise -- is meeting stiff domestic resistance. Workers and traditional
Indian businesses are as scared of competition as ever, and the Congress
Party, now in the opposition, is playing on those fears. So the government is
moving in small, often contradictory steps.
"Their hearts are in the right place," says John Band, executive director of
ASK Raymond James, an affiliate of the American investment bank.
Here is how the reforms are shaping up in five critical areas.
Privatization
India's program of selling off government companies is still mostly talk, but
much of it could come to fruition in the next few months. While the
government probably won't meet its target of raising 100 billion rupees
($2.14 billion) this fiscal year, it is likely India will shed some perennial
money losers. The first could be Air India and its domestic counterpart,
Indian Airlines, both of which have attracted expressions of interest from
foreign airlines including Air France and Singapore Airlines. Divestment
Minister Arun Shourie, who isn't revealing the full list, said on the first
day of the World Economic Forum's "India Economic Summit" in New Delhi Sunday
that before proceeding to formal bids, India will reject suitors who could
pose national-security concerns. India, he said, wants to avoid buyers who
might shut down the beleaguered airlines and keep the lucrative landing
rights.
Job padding is legendary in India, so fear of job losses is real. Bank
workers fired a warning shot across privatization's bow this month with a
one-day, midweek strike against government banks. The next day, the
government announced it was moving forward anyhow, seeking a law that would
allow it to reduce its stake in public banks below 50%. The move wasn't as
bold as it seemed, though: The law wouldn't actually contemplate a sale of
shares and wouldn't allow any single investor to buy more than 1%. Government
officials pledged to keep the "public character" of the banks.
Supporters of divestment within Mr. Vajpayee's cabinet are few but
influential. They are concentrating their efforts on a plan to sell the
government's 50% stake in car maker Maruti Udyog Ltd., a joint venture of
Japan's Suzuki Motor Corp. and India's government. But the cabinet is divided
over the sale, and Mr. Vajpayee has to keep all the members of his coalition
happy, including hardline nationalists. This weekend, Mr. Shourie flew to
Bombay to placate leaders of the radical Shiv Sena party who were upset about
the prime minister's recent olive branch to separatists in the embattled
region of Kashmir. One of their demands, he says, was that "Foreigners should
not come to acquire control of the Indian economy."
Budget pressure may force India to follow through with privatization. The
World Bank has cited concern that India's budget deficit is a whopping 9.6%
of its gross domestic product, though much of the red ink can be traced to
state budgets. Mr. Vyas of the Centre for Monitoring the Indian Economy
believes the real benefits of privatization will come only when the states
start to sell off their bus companies and electric utilities -- but "that's
not even being talked about."
Media
India has an unrestrained local press but remains suspicious of foreign
media, especially when they show naked flesh or give their own spin on the
Kashmir dispute. Technology has brought paradoxes: Indians now get scores of
channels by cable TV, but only government-controlled TV over regular antenna.
Foreign magazines and newspapers enter the country freely by the Internet but
cannot print in India. (The Wall Street Journal is among the papers that have
made informal efforts to lift the barrier.)

The newly appointed information minister, Sushma Swaraj, a BJP hard-liner,
this month seemed to be resolving the issues in favor of openness. At her
prodding, the government suddenly allowed programmers to serve homes directly
by satellite -- but with some tight restrictions on foreign ownership.
Equally worrisome was Ms. Swaraj's explanation for the government's decision
to move forward. Before, she explained, the government had no satellite
facility in India; now it did, and could cut off broadcasts that offend
India's programming code. Ms. Swaraj is looking for ways to regulate Web
sites, too. "They are bound by this code," she said. "As yet there is no
complaint. If there is, we can take care of it."
Ms. Swaraj started a "national debate" over whether to lift the restrictions
on foreign media; 10 days later ended it with a firm 'no.' But as one door
closes in India, another often cracks open. Private FM radio is expected to
make its debut in the spring. The government has also taken steps to help
film studios get expansion financing, just as Hollywood starts to prowl the
Hindi film industry for investments.
Telecommunications
The Vajpayee government has earned broad kudos for its liberalization of
telecommunications, and the results may even help build domestic support for
other reforms. Sales of new telephones have exploded recently as service
improves. In Bombay, which once had five-year waiting lists for new telephone
lines, the government's local-phone company, MTNL, now promises, even if it
doesn't always deliver, hookups in two days. The reason is new competition
from a private group that includes a unit of Hughes Electronics Corp.
Telecom investment is vital for India because so much of the country's
booming software and call-center business relies on fast communications with
the U.S. The government only recently loosened its control over international
data gateways, a move that Indians hope will alleviate heavy daytime data
traffic jams. Idika Solutions, a software company based in Hyderabad, got in
the habit of downloading files at 6 a.m. to avoid the rush.
Further reforms should speed up improvements. Next year, Parliament is
expected to pass a "convergence" law, allowing telephone, wireless and data
services to come under the same license. And the following year government
phone company VSNL is scheduled to lose its monopoly on long-distance phone
service.
Trade
In theory, India, a member of the World Trade Organization, has no choice but
to open its borders to foreign products, and so far it is sticking to
schedule, passing a new patents law and so forth. But rather than investing
to get ready for free competition, many business families are simply getting
out of manufacturing. Their worry isn't so much luxury goods from the West,
which will still face steep duties even after quotas are lifted in the
spring, but goods like batteries from China and palm oil from Malaysia. The
government is starting to heed the call for more protection: Last week, it
raised duties on cooking oil and listed 131 imported products that would have
to list prices in rupees and register with the Indian bureaucracy.
The government is also trying to prepare traditional businesses such as
textiles for a world without quotas. Still, the industry is so thoroughly
regulated that it is hard to see India's mild reforms having much effect. For
example, the government just decided to allow big domestic producers to move
into certain products that were reserved for small companies, but it still
requires yarn-spinners to produce 10% of their yarn in a form that can be
used by obsolete hand looms. With certain fabrics, "if I produce it on a
power loom, I'm breaking the law," says Ramesh Chander Kesar, president of
the Textile Association India in New Delhi. "Why should there should be a
restriction?"
The main reason is that textiles employs an estimated one of every six Indian
workers, and the government is loath to throw them out on the street.
Actually, even when mills close, as many have in central Bombay, mill owners
often have to keep paying the workers and are restricted in their reuse of
the land.
"If we can fire a worker for not working, that will send a powerful signal.
But there are no votes in it," says Gurchuran Das, former Procter & Gamble
chief in India and occasional adviser to the Congress Party. "Nobody has the
courage to explain to the people the way Clinton had the courage to explain
NAFTA: that jobs will be lost but, in the end, jobs will be created."
Some less courageous moves are possible: one idea under discussion in New
Delhi is to give labor flexibility to companies that are exporting heavily.
Finance
India made some big financial reforms in the early '90s, with liberalization
of interest rates, loosening of currency restrictions and encouragement of
private banking. The country just needs some more money to prime the system.
The government is approving new financial products, such as derivatives. The
big prize, investment bankers say, would be opening of the
government-controlled mutual fund and pension plans. Right now, they offer
fixed returns. Private investment companies want the government to let them
offer Indians more-aggressive private pensions.
"They are listening," says Raju Panjwani, managing director of Morgan Stanley
Dean Witter India. "Maybe equities are considered risky, but we can't even
invest in corporate bonds." The government has a plan under study, called
"Project Oasis," that would allow private pension fund management, with some
restrictions.
Another possible source of long-term capital is insurance, something there
isn't much of in India. The government took a big step last year in allowing
private insurance companies back into India after nearly 50 years. But as the
race to start marketing policies begins, only half a dozen companies have
jumped in. Foreign companies are limited to 26% of each insurance
partnership. That is a problem, because launching an insurance company can
take $75 million, and "there are not that many Indian companies that can
support 74% of that kind of a number," says Gary Benanav, chief executive of
New York Life Insurance Co.'s international unit. The company, which is
launching its India insurance venture in partnership with an Indian
conglomerate, estimates the Indian market could support 50 insurance
competitors.
"They've made a decision which I don't think in the long run is in the best
interests of India, though I understand it. The colonial era has left a few
wounds here," Mr. Benanav says.
Write to Danny Pearl at danny.pearl@wsj.com

Brian T. Hoskins
Enron Broadband Services
713-853-0380 (office)
713-412-3667 (mobile)
713-646-5745 (fax)
Brian_Hoskins@enron.net