- The Washington Times - Monday, January 27, 2003

CALCUTTA, India, Jan. 27 (UPI) — India is losing its sheen as a destination for foreign direct investment largely because of the better investment climate in competing economies like China, said a recently released American Chamber of Commerce in India-Gallup Business Outlook Survey 2002.

Most of the member-companies surveyed by the Chamber and Gallup felt that India will lose its importance as an investment destination over the years if the Indian government does not speed up reforms, splits it from politics and reduces red tape in its bureaucracy.

"India is mixing too much politics with the economy," said one of the chief executive officers surveyed by the chamber.

"The slow down on the urgently required reforms are sending very negative signs to our U.S. head offices. All the attention nowadays has been given to China, due to the clear policies and the speed that they implement change" the executive added.

According to Ramesh Bajpai, director of the American Chamber of Commerce in India, "Although about half of the companies covered said that India is important, most are not willing to increase investments in India in 2003 just yet."

Bajpai added, "Overall India as an investment destinations still features in their radar, but most have an immediate budget of $10 million or less."

According to Bajpai, this means that U.S.-multinational corporations, are currently just about willing to invest enough money to keep their businesses running.

The survey covered heads of United States-based companies or firms with majority U.S. stake. Eighty-eight companies with primary areas of activity ranging from banking, insurance, financial services, airline, telecom, other services industries, consumer goods, electronics, pharmaceuticals and other manufacturing industries were covered.

Experts said that this study is significant because it came as dampener in the wake of India's effort to play catchup with China as a preferred foreign direct investment destination.

"Its like throwing cold water on India's ambition of achieving a 100 percent growth in FDI this year," said Rakesh Sharma, an economist.

Early last year, the country's commerce ministry constituted a committee headed by high-profile bureaucrat, NK Singh, to examine ways in which the coverage and FDI inflows could be improved. The committee submitted in September its report that suggested sweeping measures to ramp FDI up to $10 billion this calendar year.

The Chamber-Gallup survey in contrast, said 39 percent of the respondents were dissatisfied with government efforts on inviting higher levels of FDI, while 32 percent were satisfied. The remaining 29 percent were neutral. The extent of dissatisfaction was greater in the services sector (42 percent) than in the manufacturing sector (33 percent).

Citing reasons holding back FDI, the survey said 63 percent of the respondents have picked better investment climate in other countries as the most important issue.

"Sector-specific red-tapism and bureaucracy, lack of stable policies and regulatory framework, security issues and political instability were the other reasons cited by the companies," the survey said.

While the manufacturing sector was disenchanted with the purchasing power of the Indian middle-class and the sluggish Indian economy, the services sector picked political instability and security issues as the major hindrances, the survey reported.

Dissatisfaction with infrastructure is fairly high with 75-80 percent of the respondents expressing dissatisfaction with power, ports, roads and airports in the country. Eighty-four percent were dissatisfied with government efforts to reduce red tape.

Skilled personnel was the only strength which emerged from the survey, with 72 percent of the companies expressing a high degree of satisfaction with the quality of the workforce.

Thirty-eight percent of the respondents expected a negative effect of the upcoming elections on the formulation of economic policies and governance, while 34 percent expected no effect. A steep 58 percent felt that the national budget for 2002-03 had no effect on the Indian economy, while 25 percent felt that it had a negative effect, the survey said.

Meanwhile, multinational companies planning to delist from the Indian stock exchanges are expected to grow this year. Around 140 companies were seen as drawing up plans, expect merchant bankers in India. The top 119 MNCs have a market capitalization of $20 billion.

"If expectations turn into reality, it is going to be a body-blow to India's plan of allowing Indian companies and individuals to invest in equity overseas," said Mayank Khemka a merchant banker with SMIFS Capital.

The Indian government last week allowed Indian residents — individuals, companies and mutual funds — to invest in shares of foreign companies listed on recognized overseas stock exchanges. That was the boldest relaxation yet of its control on the country's foreign exchange reserves, and took a big step toward making the rupee fully convertible.

There was however a major restriction, in that only shares of foreign companies that have at least a 10-percent stake in any listed Indian company can be purchased by Indian resident investors. However, no limit was set on the amount of individual investments.

What had been a trickle in earlier years almost became an avalanche in 2002 when nearly 100 companies either commenced desisting proceedings, or de-listed from Indian stock exchanges. This number was 16 in 2001, eight in 2000 and six in 1999.

Exiting multinationals cite that one of the main reasons for their delisting is the disproportionately high charge they have to bear to remain listed, especially in the light of new stringent corporate governance and disclosure norms.

According to Khemka, "Under current circumstances, raising private capital is much easier than remaining listed."

The other reason is that the government has relaxed investment restrictions for foreign companies and has allowed them to set up 100 percent subsidiaries in India.

Among the 140 companies that are waiting in the wings for delisting, sources say, a good number are in the benchmark indices widely tracked by the market.

The equities market has also been in the grip of a prolonged bear phase and this is what the multinationals are cashing in on; cheap exit prices.

According to merchant bankers, multinationals do not need the capital and so staying listed makes little sense. A considerable number of MNCs are in the area of fast moving consumer goods and pharmaceuticals, which provide a good hedge against volatile cyclicals.

The MNCs have also been the largest wealth creators for Indian shareholders. High profile MNCs that have de-listed or are in the process of delisting include Cadbury, Carrier Aircon, Otis Elevator, Wartsila India, Ciba Speciality Chemicals, Kodak and Atlas Copco, say merchant bankers.

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