Message-ID: <30119703.1075854583207.JavaMail.evans@thyme> Date: Mon, 27 Nov 2000 09:55:00 -0800 (PST) From: brian.hoskins@enron.com To: lenine.jeganathan@enron.com, eric.bass@enron.com, hector.campos@enron.com Subject: Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Brian Hoskins X-To: Lenine Jeganathan, Eric Bass, Hector Campos X-cc: X-bcc: X-Folder: \Eric_Bass_Dec2000\Notes Folders\All documents X-Origin: Bass-E X-FileName: ebass.nsf In this Section: World-Wide Asia Europe The Americas Economy Earnings Focus Politics & Policy ? Editorial Page Leisure & Arts Voices ? Weekend Journal. ? WSJ.com Audio: Business Update Markets Recap WSJ on Audible Learn More ? Journal Atlas: Table of Contents Headlines Business Index Search ??News Search ??Past Editions ??Briefing Books ??Quotes ? Resources: Help New Features E-mail Center Your Account Contact Us WSJ.com Gifts Glossary Special Reports Weather ? ?STOCK QUOTES ?Select exchange: ? ?Enter symbols: ?? ? ?Symbol lookup Free WSJ.com Sites: Careers College Homes Online Investing Opinion Personal Tech Starting a Business Travel Wealth of Choices Web Watch Wine ? The Print Journal: Subscribe Customer Service ? More Dow Jones Sites: Barron's Online DJ University Publications Library Reprints SmartMoney Work.com Dow Jones & Co. ? Corrections ? Privacy Policy ? Wall Street Journal and Dow Jones Newswires in Chinese November 27, 2000 Reforms in India Are Tantalizing, But Debates Cool Investor Ardor By DANNY PEARL Staff Reporter of THE WALL STREET JOURNAL NEW DELHI, India -- The tumblers of economic reform have slowly but surely been turning in India over the past decade, each click resonating through this nation of a billion people. Lately the prospect of unlocking its markets has seemed a bit brighter -- but not bright enough to impress foreign investors. Every day, India's financial pages are filled with news of a new opening: a plan to sell the government's stake in a big car company, the lifting of controls on the textile industry. But the fine print tells another story: stubborn hurdles to foreign investment, insistence on public control and open battles among ministers that could force Prime Minister Atal Bihari Vajpayee to protect his diverse coalition government rather than take fresh economic gambles. "The debate over reforms will be endless unless there is a crisis, and there is no crisis around the corner," says Mahesh Vyas, executive director of the Centre for Monitoring the Indian Economy, a private organization. India is still coasting along with economic growth above 6% a year. Still, there are some worrisome signs. Last month, Standard & Poor's lowered its outlook on the Indian rupee because of the darker prospects for economic reform. Foreign investment, already a pittance compared with the rest of Asia, has slackened recently, and a few big companies, including Enron Corp. of Houston and British Telecommunications PLC, are freezing some India investments as their focus shifts to more-developed markets. Just 14% of the multinational-company executives recently surveyed by AT Kearney said they were more likely to invest in India than in China; 56% said the reverse. Even critics think Mr. Vajpayee's nationalist Bharatiya Janata Party, which one year ago won a mandate to lead its second coalition government, is sincere about pushing for further opening of India's statist economy. But what government officials call the second generation of reforms -- India's Congress Party launched the first in the early 1990s to allow more private enterprise -- is meeting stiff domestic resistance. Workers and traditional Indian businesses are as scared of competition as ever, and the Congress Party, now in the opposition, is playing on those fears. So the government is moving in small, often contradictory steps. "Their hearts are in the right place," says John Band, executive director of ASK Raymond James, an affiliate of the American investment bank. Here is how the reforms are shaping up in five critical areas. Privatization India's program of selling off government companies is still mostly talk, but much of it could come to fruition in the next few months. While the government probably won't meet its target of raising 100 billion rupees ($2.14 billion) this fiscal year, it is likely India will shed some perennial money losers. The first could be Air India and its domestic counterpart, Indian Airlines, both of which have attracted expressions of interest from foreign airlines including Air France and Singapore Airlines. Divestment Minister Arun Shourie, who isn't revealing the full list, said on the first day of the World Economic Forum's "India Economic Summit" in New Delhi Sunday that before proceeding to formal bids, India will reject suitors who could pose national-security concerns. India, he said, wants to avoid buyers who might shut down the beleaguered airlines and keep the lucrative landing rights. Job padding is legendary in India, so fear of job losses is real. Bank workers fired a warning shot across privatization's bow this month with a one-day, midweek strike against government banks. The next day, the government announced it was moving forward anyhow, seeking a law that would allow it to reduce its stake in public banks below 50%. The move wasn't as bold as it seemed, though: The law wouldn't actually contemplate a sale of shares and wouldn't allow any single investor to buy more than 1%. Government officials pledged to keep the "public character" of the banks. Supporters of divestment within Mr. Vajpayee's cabinet are few but influential. They are concentrating their efforts on a plan to sell the government's 50% stake in car maker Maruti Udyog Ltd., a joint venture of Japan's Suzuki Motor Corp. and India's government. But the cabinet is divided over the sale, and Mr. Vajpayee has to keep all the members of his coalition happy, including hardline nationalists. This weekend, Mr. Shourie flew to Bombay to placate leaders of the radical Shiv Sena party who were upset about the prime minister's recent olive branch to separatists in the embattled region of Kashmir. One of their demands, he says, was that "Foreigners should not come to acquire control of the Indian economy." Budget pressure may force India to follow through with privatization. The World Bank has cited concern that India's budget deficit is a whopping 9.6% of its gross domestic product, though much of the red ink can be traced to state budgets. Mr. Vyas of the Centre for Monitoring the Indian Economy believes the real benefits of privatization will come only when the states start to sell off their bus companies and electric utilities -- but "that's not even being talked about." Media India has an unrestrained local press but remains suspicious of foreign media, especially when they show naked flesh or give their own spin on the Kashmir dispute. Technology has brought paradoxes: Indians now get scores of channels by cable TV, but only government-controlled TV over regular antenna. Foreign magazines and newspapers enter the country freely by the Internet but cannot print in India. (The Wall Street Journal is among the papers that have made informal efforts to lift the barrier.) The newly appointed information minister, Sushma Swaraj, a BJP hard-liner, this month seemed to be resolving the issues in favor of openness. At her prodding, the government suddenly allowed programmers to serve homes directly by satellite -- but with some tight restrictions on foreign ownership. Equally worrisome was Ms. Swaraj's explanation for the government's decision to move forward. Before, she explained, the government had no satellite facility in India; now it did, and could cut off broadcasts that offend India's programming code. Ms. Swaraj is looking for ways to regulate Web sites, too. "They are bound by this code," she said. "As yet there is no complaint. If there is, we can take care of it." Ms. Swaraj started a "national debate" over whether to lift the restrictions on foreign media; 10 days later ended it with a firm 'no.' But as one door closes in India, another often cracks open. Private FM radio is expected to make its debut in the spring. The government has also taken steps to help film studios get expansion financing, just as Hollywood starts to prowl the Hindi film industry for investments. Telecommunications The Vajpayee government has earned broad kudos for its liberalization of telecommunications, and the results may even help build domestic support for other reforms. Sales of new telephones have exploded recently as service improves. In Bombay, which once had five-year waiting lists for new telephone lines, the government's local-phone company, MTNL, now promises, even if it doesn't always deliver, hookups in two days. The reason is new competition from a private group that includes a unit of Hughes Electronics Corp. Telecom investment is vital for India because so much of the country's booming software and call-center business relies on fast communications with the U.S. The government only recently loosened its control over international data gateways, a move that Indians hope will alleviate heavy daytime data traffic jams. Idika Solutions, a software company based in Hyderabad, got in the habit of downloading files at 6 a.m. to avoid the rush. Further reforms should speed up improvements. Next year, Parliament is expected to pass a "convergence" law, allowing telephone, wireless and data services to come under the same license. And the following year government phone company VSNL is scheduled to lose its monopoly on long-distance phone service. Trade In theory, India, a member of the World Trade Organization, has no choice but to open its borders to foreign products, and so far it is sticking to schedule, passing a new patents law and so forth. But rather than investing to get ready for free competition, many business families are simply getting out of manufacturing. Their worry isn't so much luxury goods from the West, which will still face steep duties even after quotas are lifted in the spring, but goods like batteries from China and palm oil from Malaysia. The government is starting to heed the call for more protection: Last week, it raised duties on cooking oil and listed 131 imported products that would have to list prices in rupees and register with the Indian bureaucracy. The government is also trying to prepare traditional businesses such as textiles for a world without quotas. Still, the industry is so thoroughly regulated that it is hard to see India's mild reforms having much effect. For example, the government just decided to allow big domestic producers to move into certain products that were reserved for small companies, but it still requires yarn-spinners to produce 10% of their yarn in a form that can be used by obsolete hand looms. With certain fabrics, "if I produce it on a power loom, I'm breaking the law," says Ramesh Chander Kesar, president of the Textile Association India in New Delhi. "Why should there should be a restriction?" The main reason is that textiles employs an estimated one of every six Indian workers, and the government is loath to throw them out on the street. Actually, even when mills close, as many have in central Bombay, mill owners often have to keep paying the workers and are restricted in their reuse of the land. "If we can fire a worker for not working, that will send a powerful signal. But there are no votes in it," says Gurchuran Das, former Procter & Gamble chief in India and occasional adviser to the Congress Party. "Nobody has the courage to explain to the people the way Clinton had the courage to explain NAFTA: that jobs will be lost but, in the end, jobs will be created." Some less courageous moves are possible: one idea under discussion in New Delhi is to give labor flexibility to companies that are exporting heavily. Finance India made some big financial reforms in the early '90s, with liberalization of interest rates, loosening of currency restrictions and encouragement of private banking. The country just needs some more money to prime the system. The government is approving new financial products, such as derivatives. The big prize, investment bankers say, would be opening of the government-controlled mutual fund and pension plans. Right now, they offer fixed returns. Private investment companies want the government to let them offer Indians more-aggressive private pensions. "They are listening," says Raju Panjwani, managing director of Morgan Stanley Dean Witter India. "Maybe equities are considered risky, but we can't even invest in corporate bonds." The government has a plan under study, called "Project Oasis," that would allow private pension fund management, with some restrictions. Another possible source of long-term capital is insurance, something there isn't much of in India. The government took a big step last year in allowing private insurance companies back into India after nearly 50 years. But as the race to start marketing policies begins, only half a dozen companies have jumped in. Foreign companies are limited to 26% of each insurance partnership. That is a problem, because launching an insurance company can take $75 million, and "there are not that many Indian companies that can support 74% of that kind of a number," says Gary Benanav, chief executive of New York Life Insurance Co.'s international unit. The company, which is launching its India insurance venture in partnership with an Indian conglomerate, estimates the Indian market could support 50 insurance competitors. "They've made a decision which I don't think in the long run is in the best interests of India, though I understand it. The colonial era has left a few wounds here," Mr. Benanav says. Write to Danny Pearl at danny.pearl@wsj.com Brian T. Hoskins Enron Broadband Services 713-853-0380 (office) 713-412-3667 (mobile) 713-646-5745 (fax) Brian_Hoskins@enron.net