Home--News
India Pays Hefty Price to Regain US Investor's Trust
Commentary
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.
FAIR USE NOTICE. This document contains copyrighted material whose use has not been specifically authorized by the copyright owner. India Resource Center is making this article available in our efforts to advance the understanding of corporate accountability, human rights, labor rights, social and environmental justice issues. We believe that this constitutes a 'fair use' of the copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner.
|