Open Doors, Closed Minds

The recent fiasco over Maruti Udyog Ltd, where the government and Suzuki turned to the courts and fought a media war over the non-issue of appointing a managing director, is only the fin of what could well be the shark of mass discontentment. For every such public fight, there could well be a dozen battles brewing in boardrooms. And for each act of such boardroom belligerence, there could be scores of companies giving their Indian operations a re-think.

Reacting to the Maruti issue, Warwick Morris, economic counsellor at the British High Commission, said: "There seems to be a resurgence of hostility towards legal and internationally acceptable activities of foreign companies. India cannot afford to send out this kind of signals which will discourage investors." Subhash Agrawal, who advises MNCs on their India entry, agrees: "The way the industry minister dared Suzuki to quit, saying that Koreans and Germans were waiting to step in, clearly sends a wrong message to the Japanese business community, the richest group of investors no country can afford to antagonise."

 If Maruti was the exception, it might have been accepted. It wasn't. Earlier, the Tata-SIA airline venture had crash-landed because of a sudden policy shift. A frustrated Philip Yeo, chairman of Singapore's influential Economic Development Board, warned: "The problem (with India) is that for every guy saying open the door, there is another saying close it. India must realise that foreign direct investment is a zero-sum game—people don't wait; they go somewhere else."

Following Yeo were echoes of over a dozen CEOs of insurance companies that had gathered in New Delhi's Taj Palace to discuss business opportunities in insurance. Even as they were discussing the nitty-gritty of privatisation came the news of the government's inability to pass the Insurance Regulatory Authority Bill. Expressing his disappointment over the casual manner in which the bill was introduced, John Brice of the General Accident Insurance said: "Insurance is not a priority with the government." Duncan G. West, managing director, Royal and Sun Alliance, was not so subtle: "This backward step will certainly change how we priori-tise India versus other emerging economies. In the short run at least, capital and expertise will naturally flow to other markets where we can make a difference."

The Asian Paints drama followed next: simply because the buyer of a promoter's stake in Asian Paints was a British MNC—ICI Ltd—the issue of swadeshi was raked up, painting scare strokes that might deny ICI a perfectly legal, and probably profitable deal. Today, all investment is eyeing Maruti, waiting, watching, wondering.

And the despair is spreading. Korean giant Samsung has deferred its $630 million investment plan. Philips is reviewing its ambitious India plans; it plans to divert resources to China, South Korea and Taiwan where growth looks more assured. The hardest hit are probably the power sector MNCs. Of the eight fast-track projects, four are in a state of limbo, fighting a war of nerves with the government. "We might just decide to dilute our equity or walk out altogether if things don't improve," says an exasperated business development manager of one such project waiting to take off for four years. Observes Arvind Mahajan, director, A.F. Fergusson & Co: "The speed of reforms has belied initial expectations."

Those MNCs which had not put in so much money and time in lobbying have simply withdrawn quietly. In ports, highways, pharmaceuticals, information technology and heavy engineering sectors, the mood is not much different. The US multinational Hewlett Packard last month decided that China—and not India—was a viable destination for its $400-million Inkjet Pen manufacturing facility. German giant Siemens has decided that it doesn't want to pour the planned $1 billion into its Indian arm.

Canada is reacting as a country, not as a cluster of companies. According to a senior manager at a Canadian construction company, the Canadian industry has been circulating an internal memo, discouraging investments into India. Canada is not alone. The observations by a representative of the German industry are truly gloomy: "Six years back our India prognosis was: very good for the long-term, bright for the medium-term and encouraging for the short-term. Today our assessment is: might be good in the long-run, definitely not bright in the medium-term and fraught with danger in the short-term."

IRONICAL for a country that has a 50-million strong middle class, a figure that compares very favourably with the other Asian economies. Apart from this large market, there are three factors that make India look more attractive than rival China. One, a legal system that works—demonstrated by the victory of Enron in some 24-odd cases filed against it. Two, a democracy that ensures that a Tiananmen Square does not happen in India. Three, an English-speaking, technically-qualified workforce that makes business simpler to negotiate and conduct.

Yet, last year India got just $2.6 billion in foreign direct investment which works out to be less than $3 per head. In contrast, China got $42 billion—16 times more. "India is no longer the flavour of the year for foreign companies," says corporate analyst Jay Bhattacharjee. Sad that this should come in a year that has seen more decisions to free investment, make economic policies more investor-friendly, and is indeed the 50th year of India's Independence.

Why? Outlook takes a long, hard look at the new business thinking: India is no longer an attractive business destination.

Political Pitfalls: What does democracy—a 13-party coalition at the Centre, a motley of alliances in the states, elections or threat of elections, weak governments incapable of taking hard decisions or too eager to prove their worthiness by discrediting the former regimes, and conflicting ideologies and emotions that are whipped up for garnering short-term political points—mean to businessmen? The answer: renegotiated deals like Enron, indecisiveness as in the oil price hike, setbacks like the insurance fiasco, or policy shift to disallow foreign companies in airlines. Says Rebecca Mark, CEO, Enron Development: "We wouldn't like to repeat the experience of having a project cancelled post-financial close. There seems to be a lack of political will to do what needs to be done."

To foreign investors this is exasperating, confusing, mind-boggling. And India-specific. Says West: "A major difference between India and other emerging markets is the unpredictability of the pace of reforms arising from political instability. One moment you feel excited that things are moving and the next moment all hopes are dashed. The problem is that there is only a certain number of cycles you can endure." And waiting between the cycles is not easy. "When billions of dollars are at stake, patience hurts," says a representative of a German industry. This obsession with pulling the rug from under one another's feet and concentration of the government's energies in clearing internal disputes could close the doors of investment. Warns management consultant Mrityunjay Atreya: "The danger is India may lose not just two more years but a decade, as politicians with limited world-views and petty political interests ignore the national interest."

Rules and Procedures: Simple tasks have been made so awesome, so gigantic, so convoluted, that once investors get into the procedural whirlpool, it is virtually impossible to get out. Two years ago, Honda Motor Company invested Rs 450 crore in its car assembly plant at Noida, near New Delhi, without signing an MoU with the government because it was told that it was a mere formality. Today it is stuck with its still-born investment because according to the customs department, it cannot import components without the MoU. Worse, it cannot sign the MoU because the government has decided to change the MoU policy. The company's minimum opportunity cost on its investment: Rs 50 crore every year at Indian interest rates. "Overlapping jurisdictions and authority have made the whole system so confusing and lopsided that it doesn't serve the audience it is addressing," says Subhash Agrawal. At the clearance stage, proposals have to be cleared by multiple agencies. At implementation stage, there is no project that requires the approval of only one ministry (see box on clearances). Says Sid Khanna, managing partner, Andersen Consulting: "Everything takes three times as long."

AN incoming pharmaceutical company, for instance, needs to liaise with the ministry of fertilisers and chemicals, food & civil supplies, health, finance and industry. An auto company has to deal with the ministry of industry, finance and commerce among others. Under each of these ministries there are various departments. "There are just too may people involved in the implementation of new projects. The responsibilities of India's power centres are not clear," said Paola Cantarella, CEO, Fiat, on his recent visit. A spokesperson for a foreign power company awaiting clearance echoes his views: "All clearance, MoUs and licences must be issued upfront through a single window. Where more than one ministry is concerned, the government must liaise across them and get the paperwork done. It's not the job of the company to go knocking from door to door."

 Unfortunately, even the rules are ambivalent, easily changed, far more easily manipulated and ad hoc in nature, making it impossible for quick and binding decisions. For instance, the RBI grants "in principle" clearances for a number of projects. "In practice, this does not exist," says Devashish Dasgupta, a consultant with Corporate Catalyst, a firm advising MNCs on entry strategies. Reason: the endless queries that the investor has to grapple with. The minimum period to get an application processed is three months. Contrast that with Japan's 15 days of setting up the project—not of obtaining prior approval. Or China's seven days.

Since there are no clear-cut, consistent, stable, transparent and non-discriminatory guidelines, companies put in their applications on the basis of applications that have been approved. Another practice: negotiate with the government before putting in the application because once rejected, the proposal could take up to three years to regenerate. Recently, liquor giant William Grant's application was rejected by the Foreign Investment Promotion Board after nearly two years on the ground that its Indian partner didn't have a licence. In its India survey, The Economist noted: "Delays, complexities, obfuscations, overlapping jurisdictions and endless requests for more information remain much the same as they have always been." Rebecca Mark of Enron has seen it practically: "In the power sector, one needs clearances from both the centre and the state with no clear-cut definition of the extent of authority that each has."

Infrastructure Inadequacy: According to finance minister P. Chidambaram, 2 per cent of India's GDP is throttled due to infrastructure snags. "The reason why the cost of TVs, refrigerators and washing machines is high in India is primarily the high cost of transportation and import consignments getting stuck at ports," says Ravi Nookala, senior manager, Sony India. And sadly, it is the infrastructure—power, telecom, roads, ports—where investors are most frustrated.

Take basic telecom services. Two years ago, bids were invited in 20 zones. After opening the bids however, investors were told that there was a limit on zones and they would have to pay more. Many major firms just opted out. There were no bids in eight zones and in the remaining circles the controversy over inter-connectivity norms and legal wrangles is holding business and investors on ransom. In power, the scenario is worse. Rules are changed with the impunity that would put fear in the hearts of the most resilient. In the fuel linkage controversy, for instance, after committing fixed delivered price of naphtha to private power producers, the government has now discovered that it neither has the facilities, nor the funds to make this fructify. So the private producers must finance and facilitate this. But what of the power purchase agreements they have signed with state governments on the basis of earlier commitments?

The government obviously believes that that is the headache of the companies. "This can only lead to chaos and confusion," says Vinayak Chatterjee, chairman, Feedback Ventures.

It works like this: neither the railways nor the surface transport ministry is willing to guarantee fuel linkage; oil PSUs are willing to import naphtha, but unwilling to guarantee its quality; in the absence of this, equipment manufacturers will give no performance guarantee; this will make the projects non-bankable for banks; which in turn would prevent projects from financial closure; which would finally result in shelved projects—no power. Without power, another cycle gets moving: no industry, no jobs, no revenues. In the Eighth Plan, just 16,423 MW of power was added—46 per cent short of targets, and 23 per cent less than the capacity added in the Seventh Plan. But there seems to be no let-up in grandiose plans: the Ninth Plan target is 57,735 MW—or 11,547 MW per annum—which in all probability is likely to stay on paper.

 Labour Pangs: In the absence of a system of social security, the Indian labour laws that guarantee lifetime employment are acceptable to many Western investors. But what rattles many investors is the bizarre extent that the idea moves to in reality. "Lifetime employment is one thing, but what about employment in perpetuity? When a worker retires, his job goes to his son, or relative or other nominee. It's standard practice here," says the representative of a foreign firm that is finding itself at odds as it is trying to scale back operations.

The logic of rules is even more mind-boggling, he points out. If companies are trying to cut back on labour, it's because profitability is low. Not having permission to cut wages or sack workers, they face the possibility of closure. But it's like the government has thought of that too. Shutting down a company is forbidden too. Says Premal Parekh, executive director (corporate finance), Coopers & Lybrand: "One issue that bothers most MNCs is the poor exit policy. The inability to exit fairly is dissuading."

 Simple laws are complicated. Wages are defined in 11 different ways under 11 different statutes. Workers may be employees, workmen, working non-employees or employed persons, each governed by different statutes under different laws. There are 45 laws governing different aspects of employment. The government not only regulates job appointments through labour exchanges but job specifications. Some states even forbid changes unless every worker consents to them. To many foreign firms, these are not labour practices but anti-free enterprise practices.

Corruption and Ethics:Doing business in India is not just about bureaucratic delays; it's also about dishonesty. Two years ago, a top official of a $2-billion Japanese comp any flew down from Tokyo to select land for a $45-million machinery project in Maharashtra. He finalised an 8-acre plot and on the understanding that the full payment would be made once the company had the RBI clearance, he flew back. Six weeks later, when he returned, clearance completed, he learnt that the plot had been sold. Worse, it had been sold not six weeks but more than a year ago. He was offered an alternative site which he accepted, but the horror has not left him. "As far as I am concerned, the Indian government cheated me," he says.

Another company that recently set up base in India discovered that its import consignments were repeatedly getting stuck at the customs cargo shed at New Delhi airport. Apparently, the company had not paid heed to the local official's compulsive habit of "working efficiently" only if he got his percentage of value of imported stuff. Bribing your way through may be acceptable to the Japanese, Koreans, British, French and even the Italians who are used to it and often look at it as cost of business in exchange for "goodwill".

THE Canadians, however, refuse to bribe as a matter of ethics and there is a law in the US against bribing which they follow religiously, points out Bhattacharjee. Corruption has totally demoralised the foreign companies which are thinking in terms of other Asian countries, he says. When they can think of producing in India and selling here and in third countries, they can always produce in the neighbouring country and sell here. "That way they can have access to the market at a fraction of the hassles attached to producing in India."

 As far as business ethics go, Indian businessmen leave a lot to be desired. A commercial attache of a European embassy cites the example of a company which came here three years ago and set up a joint venture to make blister packs for pharmaceutical use.