ASTATE government's decision to scrap a $2.8 billion power
project - the largest single foreign investment in India - has
renewed a spirited debate over the role of foreign companies in
India's economic reforms. The decision has shaken investor
confidence, analysts here say, and may set back India's attempts to
transform its socialist-style economy into yet another Asian tiger.
Last Thursday, officials in the western state of Maharashtra,
India's industrial heartland, decided to cancel an electrical power
project being built by the American firm Enron, along with General
Electric and Bechtel. "The project is against the interest of
Maharashtra and its people," Manohar Joshi, the state's chief
minister, said in a speech to legislators. "The negotiations were
one-sided and whatever Enron wanted was granted," he said. The
contract with Enron was negotiated by a previous state government,
headed by the ruling Congress Party.
Officials in the newly elected state government say they
canceled the project because it was negotiated in secret without
any competitive bidding. Enron also failed to assess the
environmental impact of the huge power project, they say, and
Indian consumers would pay inflated prices for Enron's electricity.
To go ahead with the project, said Chief Minister Joshi, "would
betray the trust of the people."
Sending the wrong signals
Many Indians applauded the decision to cancel the project, but
financial analysts say it represents a setback for India's economic
"This will send wrong signals to potential foreign investors,"
says Baldev Lal, co-chairman of the American Business Council, a
group representing American companies that do business in India.
Already, one other US power company, CMS Generation Corporation,
says it may put two of its Indian power projects on hold. The
projects, in the state of West Bengal, are worth $1.5 billion.
India began reforming its economy in 1991, openly inviting
foreign investment for the first time. American investment there
has since increased dramatically. The United States Commerce
Department considers India one of the world's 10 largest emerging
Manmohan Singh, India's finance minister and architect of the
country's economic reforms, conceded that the decision to scrap the
project "might have its impact on the investment climate in the
country," but he added, "We will somehow manage."
Foreign companies investing in India may find it difficult to
persuade banks to loan them money for projects in India. In their
competition with China for foreign investment, Indian officials
have often argued that their country offers a Western-based legal
system where contracts are honored - a claim that may be harder to
make in light of the Enron decision. …