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All Coke, no power -- India's foreign investment woe

US power firm AES Corp is threatening to cut its Indian investments because it is unhappy with the way it is regulated while UK soft drinks group Cadbury Schweppes wants to take full control of its Indian subsidiary.

That, analysts say, reflects the contradictions in India's policies towards foreign companies. A decade after dropping the welcome mat for overseas investors, economic reforms are faltering in areas where funds are needed most while less essential industries are doing fine.

Bankers say a host of foreign firms have dug in for the long haul. But many others have fled, driven away by policy flip-flops, archaic laws and powerful lobbies.

Typical of the policy changes that anger investors was the government's decision to let fixed-line telephone firms offer wireless services within a limited radius. Mobile operators were aghast, saying the new competition threatened their huge investments in operating licences.

Rules and transparency

"The fundamental impediment to foreign investment is rules and transparency. Foreign investors want the rules of the game spelt out clearly and not changed too frequently," said Sunil Gulati, managing director of ING Barings India.

After abandoning long-held protectionist policies, the government has allowed foreign firms to set up fully owned subsidiaries in such sectors as refining, pharmaceuticals, power and roads -- in most cases without prior approval.

When full ownership is barred, investors have set up joint ventures or bought stakes in local companies. In the largest such deal, Singapore Telecom was part of a group that pumped $460 million into telecom firm Bharti Group.

These foreign companies have been investing often modest sums to build plants and warehouses, distribution networks and shops to cater to India's estimated middle-class population of 150 million to 200 million.

From Coke to Kellogg's, Hyundai to Ford, LG to Samsung, middle-class Indians have seen their choice of fast foods, cars and electronics explode.

Sectors like engineering, pharmaceuticals, software and cement have got a fair share of investment too.

But the country has failed to attract much larger sums needed to finance big infrastructure projects, like building new power plants, roads, bridges, dams, ports and airports.

Foreign companies which pursued opportunities in those areas have often abandoned the effort due to ever-changing policies.

"One of the crying needs is to narrow the difference between approvals and realisation," said Satyajit Lahiri, marketing manager at management consultancy AT Kearney.

"The maze of laws and approvals needed after basic approval and before setting up shop are very effective dissuaders."

State plays spoilsport

Foreign direct investment inflows totalled $3.19 billion in the January-August period, up 33 per cent over a year ago.

Still, analysts predict this year's net FDI flows will again be just a quarter of the $10 billion that India has been aspiring to attract in each of the past five years.

The country's reputation among foreign companies has been damaged by a high-profile dispute between its biggest investor, US power group Enron Corp, and the government of Maharashtra.

The row over a controversial power plant has hogged headlines for years, and Enron had decided to quit India even before it plunged into a crisis that threatens its survival.

Other power companies have already gone, including independent US utility Cogentrix Energy Inc, South Korea's Daewoo Corp and Electricite de France.

Efforts to attract investment in state-run firms have fared no better. The government is struggling to privatise some of the 240 firms it owns, nearly half of which are in the red, but is reluctant to restructure them or give up a majority stake.

Its plan to sell a 40 per cent stake in overseas carrier Air India failed when Singapore Airlines, part of the only qualified bidding consortium, backed out in September citing political opposition.

"The guidelines have to be changed. You cannot expect people to put large sums of money and commit management resource unless they can control its destiny," said P Krishnamurthy, managing director of JM Morgan Stanley.

"Worldwide, privatisation has succeeded where restructuring has preceded," he added.

Some stick it out

Yet multinationals like France's Lafarge, Lucent Technologies Inc, Japan's Hitachi Machinery and several automobile manufacturers have braved the red tape.

Korean Hyundai Motor's investment in its subsidiary may touch $1 billion next year.

"Many foreign investors tend to rant about procedures, but if you condition yourself to live by the book things are not necessarily choppy," said Y S Kim, Hyundai India's managing director.

This year the economy, headed for a third year of slower growth, itself is discouraging investment.

"Foreigners find their original expectations of generation of demand have not been met," said B B Bhattacharya of the Delhi-based Institute of Economic Growth.

"Besides, the labour costs and laws make it less viable to produce and export from India."

With 70 per cent of the billion-strong population living in rural areas, and half the urban crowd poor, analysts say that leaves companies with a market of just around 10 per cent of the country.

China, the only nation with a larger population, has a per capital income three times India's, more effective government guided investment, more flexible labour laws -- and 20 times the FDI flows.

Ten years after opening the door, analysts say it may take India another decade to catch up with the more appealing investment destinations in Asia.

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