Dec 14, 1998

Unfazed by political uncertainty, global majors want to pump in funds--only after the government speeds up reforms.

By Shefali Rekhi

The timing couldn't have been worse. Just a day after the BJP's stunning debacle in the state polls, the prime minister had to address 400-odd delegates, many of them foreign investors, at the annual briefing of the World Economic Forum (WEF). Speculation was rife at Delhi's Vigyan Bhavan, the venue of the summit: Would the developments mean another bout of political uncertainty? And what about continuity in reforms? Atal Bihari Vajpayee did try to sound reassuring. "Whatever is happening now is a sign of the vibrancy of democracy," he said. "The volatility in politics will have no impact on reforms. They are irreversible."

Coming from a prime minister whose government appeared to be shaky following electoral setbacks in three states, such words may have been dismissed as hollow. But not by this attentive audience. As Vajpayee read out his 12-point economic initiative to speed up the reforms process, they whole-heartedly applauded. Says Peter A. Wagner, member of the advising board and managing director (emerging markets) with global consultancy firm A.T. Kearney Inc: "Investors have done their homework and they are keen to invest, but they are waiting for a trigger point -- something like a really huge investment decision that would be a resounding vote of confidence." Simply stated, it means that while everyone says he is interested in investing in India, few are willing to put their money where their mouth is. Annual foreign direct investment (FDI) flowing into India is only about $3 billion (Rs 12,750 crore) while China has attracted $31.4 billion (Rs 1,33,450 crore) in the first nine months of this year.

There's good news yet. The Chinese economy is finally showing signs of slowing down and the developed world is searching for another high potential market. India's growing economy and its commitment to reforms represents hope. WEF President Klaus Schwab underlined this in his address during the inaugural session when he said, "If the right steps are taken, India could be among the fastest growing economies in 1999." If the international presence at the WEF meet was any indication, foreign majors are anxiously waiting for those right steps to be taken.

A reiteration of the growing investor interest emerges from a survey by A.T. Kearney this February-April of 1,000 global majors which account for 70 per cent of FDI flows into India. These corporates ranked India as the fifth most attractive market after the US, Brazil, China and the UK. India also had the highest degree of positive change in investor confidence with over 20 per cent of all respondents citing an improvement in their outlook over last year. And 60 per cent of all respondents said there was a medium to a high likelihood of investing in India over the next one to three years. Says Wagner: "There has been a dip after the nuclear tests and India ranks seventh among 25 countries but is still priority."

With most of the emerging market economies still in turmoil, India indeed is better placed. Indonesia's economy grew at the rate of 8 per cent in 1996 but may well shrink by 15 per cent this fiscal. The South Korean economy has already shrunk by over 5 per cent in the first half of this year, while Malaysia and Thailand continue to be gripped by negative growth.

Not surprisingly, investors even from China want a bigger play in the Indian economy. Says Zhao Zhongyu, chairman of the Panzhihua Iron and Steel Group of China: "Most countries in this region are showing negative growth but India is growing at 5 per cent. That makes it a nation of great potential." For investors like Zhongyu, the continuation and depoliticisation of reforms have added to India's sheen. Anxiety levels did run high when the BJP took charge and embarked on its swadeshi rhetoric. However, recent decisions, especially the cabinet approval of 26 per cent direct foreign equity in insurance and amendments in the Patents Act to permit exclusive marketing rights to new drug discoverers have been soothing. Says David Eldon, chief executive officer of Hongkong and Shanghai Banking Corporation: "We do get the feeling that political changes may not affect reforms. It's getting easier and easier to do business here."

But can India translate these positive impressions into increased FDI inflows? Is it in a position to cash in on the opportunities coming its way? India watchers believe the country needs to improve its competitiveness to kickstart the economy. But attracting more FDI to boost foreign exchange reserves is an uphill task and the goal is some distance away. Investors do seem bothered about red tape, the reluctance to take tough decisions, the lack of an impetus to improve allocation of resources and the continuing slowdown that has thrown fiscal targets into disarray.

Joseph W. Ferrigno, president and chief executive of Prudential Asia Infrastructure Investors, suggests that India should simply go in for more privatisation. Others like Patrick Amos, general manager (business development) with CMG Asia, an Australia-based financial services company that manages $45 billion in funds, believe that things need to be speeded up. Says Amos: "The pace of reforms is slow. I've been coming here for the past five years hoping for change on the insurance front, and even now it's not completely through." It is time India stops testing the patience of investors and implements change before it is too late.

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