India's Strife Slows Foreign Investment

Article excerpt

A BANKER from Britain came to India last month looking for investment opportunities. On the final day of his trip, March 12, he narrowly escaped being killed by a terrorist bomb that exploded at the Bombay Stock Exchange. He drove to an airline office and, shortly after leaving that building, another bomb went off. On his way to the airport, two more bombs exploded along his route.

For decades, foreign investors had one key worry about India: whether the government would let them in. Now India is rolling out the welcome mat at a time when foreign investors have plenty of things to worry about, including political instability, violent communal riots, rising Hindu fundamentalism and, as the banker discovered, the threat of terrorist bombings.

These troubles could hurt India's chances to advance after four decades of economic xenophobia. Foreign investment is a key part of the government's effort to open up and modernize the economy. And the country has lots of catching up to do.

"The total amount of foreign investment we've gotten since 1947 is less than what Indonesia gets in one year - and far less than what China gets," says Ajit Dayal, a Bombay-based investment analyst. According to the India Investment Center, foreign investment approved from 1981 to 1990 was Rs. 12.7 billion, a paltry $410 million.

India's ambivalence to foreign investment is deep-rooted and bound in a skein of cultural and political threads. Since independence in 1947, India has been wary of the outside world. Partly, this was a lingering fear of colonialism: It was through foreign trade and investment that Britain and other European powers colonized India. Partly, it was a desire for economic self-sufficiency. India has never experienced the rapid modernization East Asian countries are undergoing.

In addition, India chose a planned, quasi-socialist economic system that allowed the government to micromanage industry through Draconian controls. The government owned major industrial sectors, including power generation, insurance and, since 1969, banking. Industrialists were told what to produce, the quantities, and the prices. This served both to conserve resources and to curb the profits made by the private sector.

Foreign investments were encouraged only in export and high-tech industries. …