Thursday, December 11, 2008

HOW RISKY IS INDIA




With Steve Hamm in New York, Mehul Srivastava reports for BusinessWeek from New DelhiNandini Lakshman covers India business for BusinessWeek


New Delhi/Mumbai - Until Nov. 26 the strongest force pushing India forward was a mix of good fundamentals and that intangible something that industry calls "sentiment." Forged in the years of 9% growth, this euphoria inspired Indians to economic greatness and lured outside investors eager to be part of the Indian miracle.

Then the shooting started in south Mumbai. The three horrendous days that followed laid bare the gaps between India's image and reality, sparking a nationwide introspection about the nation's future. The fear is that India's mounting problems could drag the country back to its pitiful past. Its governments, despite a manufactured public image, have always been unwieldy; its economy, despite the plenty of the boom years, is premised mostly on future potential; and its much-flaunted stability is no such thing.

India's fragility is revealed by a pattern of diffused violence—a bomb here, a killing there—that goes unnoticed even in India. Most outsiders (and most investors) don't realize how dangerous a place India can be. Since 1993, when 13 bomb blasts in one day killed 257 in Mumbai, just over 29,000 people have died in terrorist attacks, including insurgencies in Kashmir and the Northeast, according to aBusinessWeek analysis of data from the Home Affairs Ministry. Thousands more have died in anti-Muslim riots. At least another 4,500 have perished since 2002 in a Maoist rebellion that simmers, and sometimes boils over, in the mineral-rich region of Chattisgarh, where foreign companies plan to invest heavily.Just after the Mumbai attacks, three people were killed in a train blast in Assam, a northeastern state that produces more than $2 billion worth of tea each year, most of it exported. "It is not just this one unprecedented attack in Mumbai," says Chandrajit Banerjee, director general of the Confederation of Indian Industry, India's most influential trade lobby. "Across the country we see...violence."

These strengths still attract investors. But foreign companies are not immune from the violence.  In Orissa on the east coast, where billions in foreign investment lie tied up, Korean companies like steelmaker Posco have had executives kidnapped and land promised to them but never delivered: Protesters wield slogans and weapons to keep earthmovers at bay. In New Delhi, the Indian CEO of an Italian company's subsidiary was killed by a mob of employees angry over layoffs. And Patrick Cescau, CEO of consumer-products giant Unilever (UN), narrowly escaped death in the massacre at the Taj Mahal hotel where he was dining with colleagues.

 

SEEKING PROTECTION—FAST

If south Mumbai is visited by violence again, the 110-plus multinationals with regional offices there could be targets. Citigroup (C), Bank of America (BAC), ABN Amro, HSBC (HBC), Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM)—all have offices there. "The targets identified demonstrate that the intention is to create panic and shatter the confidence of investors in India and global investors coming to India," says Habil Khorakiwala, managing director of Indian drugmaker Wockhardt. The private equity arms of Morgan Stanley, and Englefield Capital, which have offices in the Oberoi Trident Hotel, are looking for new premises in the city, according to an investment banker.

No wonder Raghu Raman's phone has been ringing nonstop. An ex-Indian Army man, Raman is CEO of Mahindra Special Services Group, which offers security to blue-chip clients like Hindustan Unilever, Merrill Lynch (MER), ABN Amro, HSBC, and others, many of whom want to beef up their security. Prospective clients also want protection fast. Raman says some multinationals have temporarily flown their top expat execs out of India.

And the tentacles of the global credit crunch have spread into India's relatively well-capitalized banks, slowing economic growth to 7.6% this quarter from more than 9% earlier. Exports dropped 12.1% in October, vs. a 51% jump in the same month last year. "It's a crisis situation," says Ananthasubramaniam Prasanna, chief economist at brokerage ICICI Securities. But he adds: "The focus now is on internal security and not fiscal policy." Worse, the prospect of a national election in April has reduced the government to lame-duck status.

LOYAL TECH CLIENTS

In the northern states of Bihar and Uttar Pradesh, nearly 500 million people endure in an economic wasteland created by political turmoil, extreme corruption, India's highest crime rate, and its lowest per-capita income. Industry, local and foreign, has fled those states, or never dared venture there. Economic growth is less than half the national average. The people are among India's most illiterate, with a life expectancy worse than that of sub-Saharan Africans.




An Indian soldier in front of Mumbai'sTaj Mahal hotel during the siege; owner Ratan Tata of the powerful Tata Group vows to rebuild the ravaged landmark David Guttenfelder/AP Photo

Not long ago, almost all of India resembled these two states. Even when reforms opened up much of the economy in 1991, real, measurable growth was held back for years as coalition governments collapsed, a border conflict with Pakistan threatened to spread, and scandals eroded faith in the financial markets. Only in 2001, when a stable government focused on the economy with a brand message called "India Shining," did things take off.

Which India will prevail—the India that nurtures global industries and rising affluence or the India of stalled hopes and endemic violence? A year ago the answer was clear: The new India would win. That is probably still true, but India now faces a struggle.

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