India Pays Hefty Price to Regain US Investor's Trust
By Andy Mukherjee
Bloomberg News
July 20, 2005

As an excited Bush administration hosts the Indian prime minister, Manmohan Singh, in Washington this week, one can't fail to notice the dramatic shift in U.S. perceptions of India as an investment destination. Nor can one ignore the high price paid by Indian taxpayers to bring about that change.

In four years, the country has gone from being written off as a reckless violator of commercial contracts to being celebrated as an exciting - and safe - bet for U.S. businesses.

In May 2001, a few months before Enron collapsed amid accounting irregularities, its 740-megawatt plant in India had to shut down. The state-owned utility that was its sole customer had stopped paying bills, saying prices were too high.

The Bush administration came quickly to Enron's aid. It did not matter to it if the Dabhol Power project was a white elephant for a developing country. What did count was that the Indian government had guaranteed the investment and was now reneging on its contractual obligations.

U.S. officials issued dire warnings that India's clumsy handling of the matter could affect investment flows into the country. The trouble with India's investment climate, Christina Rocca, U.S. assistant secretary of state, said in a July 2001 speech in New Delhi, was to be summed up in a five-letter word: Enron.

If the U.S. government has changed its assessment, that is partly because India's economic prowess is much more evident in the second term of the Bush presidency than it was in 2001. The credit for that goes to the rising visibility of India's computer software and call-center industries. Besides, the United States needs an ally in Asia as a counterweight to China. Only India fits the bill.

Another reason is that companies like General Electric, which became a major party to the Enron dispute by picking up a large chunk of the failed power plant, cannot afford to be shortsighted. GE will not want to lose access to a fast-growing market like India for the sake of one project.

Most importantly, however, the Indian government settled the Enron dispute out of court just days before Singh's U.S. trip. The Enron plant, now fully Indian-owned, will be restarted. Indian taxpayers will bear the burden of the project, which will cost India 30 percent more than an equivalent new project, according to Prayas Energy Group, a researcher based in the western Indian city of Pune.

"This is the cost Indian people and Indian taxpayers are paying for the Himalayan blunder of our political bosses," Prayas analysts said in a June 18 article in Economic and Political Weekly, an Indian journal.

With the Enron dispute out of the way, U.S. diplomatic efforts have moved on to an opportunity that India has zealously guarded from foreign intrusion: its $330 billion retail market. In just two years, India has overtaken Hungary, China, Slovakia and Russia to take the No. 1 slot on the consulting firm A.T. Kearney's 2005 Global Retail Development index, which ranks emerging markets by the size of the opportunity they present to companies such as Wal-Mart Stores, Carrefour and Ikea.

"Liberalization of India's retail sector," David Mulford, the U.S. ambassador to India, wrote in Monday's Wall Street Journal, is a "strategic reform vital to India's future."

He added: "International giants like Wal-Mart buy billions of dollars of goods in India annually to sell to foreign consumers. Current Indian law prohibits these same companies from selling goods to consumers in India."

Washington hopes to crack open the Indian retail market, even though India's communist parties, which keep the federal government in power, have asked Singh to refrain from giving a go-ahead to Wal-Mart during his U.S. visit.

Singh would be cautious in opening the retail industry, if for no other reason than to avoid the kind of public-relations disaster that can follow when a big-ticket foreign investment goes wrong in a developing country.

Even when Enron filed for bankruptcy in December 2001, Rocca and other U.S. officials were in no mood to overlook the Indian government's failure to restart the unit or to honor its guarantee. "The company name doesn't really matter," Rocca said during an April 2002 visit to India. "The situation was sending signals to the business community that sanctity of contract was not necessarily respected" in India.

Last week, Bechtel Group, the U.S. engineering company that had bought a chunk of Enron's shares in the shuttered Dabhol Power, agreed to sell its entire 42.5 percent stake to an Indian government-backed company that will restart the plant. Bechtel also decided to end litigation with the Indian government.

GE, which owned another 42.5 percent of Dabhol Power, announced July 4 that it too was selling its equity holding in the company and withdrawing all suits, including arbitration claims for as much as $6 billion. Indian lenders have bought out foreign creditors' claims.

Now that India has made peace with the Bush administration by paying for the Enron albatross, Singh will expect a return gift: advanced nuclear technology and support of India's bid for a permanent seat on the United Nations Security Council. As for opening up the retail industry, Singh's government would do it sooner or later, though India will not be half as desperate for Wal-Mart as it was for Enron.

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