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Enron action may tarnish India's image

India, already a black hole when it comes to foreign investment, cannot afford the headlines it's grabbing now: news Houston-based energy giant Enron may be bailing out of an almost complete $2.9 billion power project.

Unable to collect $48.3 million for power supplied to a virtually bankrupt Indian state electricity board -- even after invoking state and federal government guarantees -- Enron this week asked creditors to approve taking steps toward terminating the project.

Analysts warn the action is likely to further tarnish India's lousy image as a place to invest, causing direct foreign investment to decline from a trickle to a drip.

"Foreign investments may dry up because of Enron," says Gajendra Haldea, senior consultant at the National Council for Applied Economic Research.

The amount multinational corporations invest in India has been low.

India attracted just $2.6 billion in direct foreign investment last year, three times less than Singapore, a nation with an economy one-fourth its size -- and 250 times fewer people.

China, the one nation with a roughly comparable population and an economy twice the size of India's, attracts 20 times more.

Due to bureaucratic delays in approving new projects, drastic changes in government policies and regulations, and disappointing returns, foreign direct investment in India has withered in recent years, even as FDI flows boomed globally.

FDI inflows into India fell by 26 per cent in 1998, and by another 17.7 per cent the following year.

Last year global FDI flows rose an estimated 23 per cent to $1.1 trillion, according to the Economist Intelligence Unit. India's portion -- $2.6 billion or 0.24 per cent.

Forgotten promises

The situation was a lot different a decade ago. In the early 1990s, India looked set to turn its back on decades-long dedication to socialism and Gandhi-inspired self-sufficiency by opening its economy to trade and foreign investment.

The US government for one reacted enthusiastically by designating India as a "big emerging market", prompting Fortune 500 companies like General Motors, Ford and Proctor and Gamble to draw up plans to build factories there.

But old habits die hard, and over ensuing years the impulse toward change was stifled by political factionalism in the world's largest -- and messiest -- democracy.

Ambitious plans to privatise state-run companies that dominate the petroleum, power generation, telecommunication and airline industries foundered, often due to opposition by labour unions.

The cost to India can be gauged by the amounts that flowed into countries where privatisation did occur. Last year Brazil attracted $30.6 billion primarily from the sale of state assets; in 1999, Argentina tripled its FDI inflow, and Chile sucked in $9 billion, due largely to divestment.

Some Indian government officials figure Delhi could raise $20 billion within a half year if divestment were pursued properly.

Disappointing returns

FDI has also declined because of the disappointment felt by MNCs that have invested in India.

An A T Kearney study of the global FDI market found that while India is perceived as offering one of the highest potential returns on investment, actual returns are among the lowest -- lower than Africa.

With so little evidence of the benefit of investing in India, and Enron-like evidence of the problems faced by companies which try, many multinationals avoid the country.

About 30 per cent of the top 100 transnationals have no presence in India. Carmakers like Nissan Motors of Japan and Volkswagen of Germany, retailers like US-based Wal-Mart Stores and Royal Ahold of the Netherlands, and metals producers like Broken Hill and Rio Tinto have no operations in India.

Hostile takeovers

Indian government restrictions on corporate takeovers have also caused FDI to shrink.

There have been no hostile corporate takeovers in India since 1997, when the government began requiring multinationals to get a no-objection certificate from the board of an Indian takeover target.

And restrictions on financing make even friendly takeovers difficult.

As a result India has missed out on the boom in cross-border mergers and acquisitions.

According to the Economist Intelligence Unit, cross-border M&As accounted for about 30 per cent -- or $290 billion -- of FDI flows last year. But in India, only $776 million of cross-border M&As took place in 1999, down nearly 50 per cent from the 1997 figure.

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