Ignoring India.

An India booster explains why investors still largely overlook one of the world's largest emerging economies.

In 1978, President Caner made an official state visit to India. At the time, the trip was expected to herald a new beginning in the often-difficult relationship between the world's most powerful democracy and the world's most populous democracy. Unfortunately, nothing much came of the Carter visit, and relations between India and the United States stagnated. It took twenty years for another U.S. president, Bill Clinton, to visit India. He, too, heralded a new beginning and a new era of understanding between the world's most powerful and populous democracies. All indications are that President Bush will pick up where President Clinton left off in making relations with India a higher priority in U.S. foreign policy. Whether this is a tree beginning or just another false start depends upon India as much as it depends upon the new American president. The ball is in India's court; it's leaders, in short, have to decide if they are going to matter.

For the past several years I have been associated with International Equity Partners (IEP), an asset management company that operates a very successful investment fund in India. As a board member of this company, I have traveled to India extensively. Like many Americans before me, I've taken an interest in India's an, culture, history, and politics. I have also been privileged to meet and befriend many brilliant, talented, and patriotic Indians in the fields of business, government, and the arts.

India and the United States have many important economic, security, and political interests in common. On economic and commercial matters, there has been a growing awareness of India among business leaders in the United States. The litany of facts, repeated ad nauseum by every Indian business and political leader, about a large middle class, English as the language of commerce, an established legal structure based upon the common law, a vast pool of highly trained technicians, etc., etc., is very well known and, frankly, getting tiresome. However, one thing still secret about India is that its regulatory and legal framework currently allows passive investors to put dollars into India and take dollar profits out. It takes a lot of legwork, patience, and a commitment to have your people on the ground. But it can be done, which is a lot more than one could say about other emerging markets.

Increased convergence in our national security interests and an increased awareness and engagement in commerce is the good news in Indo-U.S. relations. But, there is some bad news too. India must do much more than it has to date to open its economy to the rest of the world. Moreover, Indian government leaders must begin to fundamentally change their attitudes towards greater economic liberalization and relations with the United States.

In a private meeting I had with Prime Minister Vajpayee last year, it was clear that he was enthused by the prospect of President Clinton's visit and eagerly anticipating a broader, more active relationship with the United States regardless of who won the elections in 2000. Based upon comments made by then-candidate George W. Bush and his National Security Adviser, Dr. Condoleezza Rice, it is clear that the new administration also wants a warmer, more cooperative relationship with New Delhi.

Nevertheless, potential areas of friction remain. One in particular is that some Indian leaders may expect the new administration to do more than its share to make up for past slights and indifference. However, I suspect there will be no patience with this attitude in the new Bush administration. Everything about the initial days of this administration broadcasts that in almost all matters, both foreign and domestic, the Bush team will look forward and have an open door. Will India's leaders also be willing to do the same? That remains to be seen because many in India's political class still have a defiant and almost arrogant attitude regarding relations with the United States. India has been a proud and sovereign nation for over fifty years. The nationalistic, Nerhruvian rhetoric that may have been in vogue in 1951 is an anachronism in 2001.

With regard to foreign investment, too many Indian leaders have begun to believe their own spin: that the Indian market represents rare, low-hanging fruit so attractive that they can dictate terms of investment and pick among the foreign partners and industries that they find the most desirable. They have thought this for a decade, and during that time India has fallen farther and farther behind its competitors in the developing world. The simple reason is that India is doing the right things, but not doing them fast enough.

For the past ten years, successive Indian governments have been making slow, halting steps towards privatization, deregulation, and modernization. However, they must do much more, and they must move forward faster because of the tremendous competition among developing nations for American capital. The longer India takes to fully reform, the farther and farther it is going to fall behind China, Thailand, and Argentina, just to name a few. Despite the halting pace of reform, many Western business leaders believe it is still an open question whether India or China is a better long-term prospect for investment and commerce. India has had a lot of shoppers but not many buyers, and it is time to start closing the deal. The abstract potential of the Indian market is not enough to foster and sustain a robust relationship with the United States. Ultimately, for India to be important, it must present a compelling opportunity compared to other markets.

The consequences for India of falling further behind other emerging nations are not abstract. I am continually amazed that one can find hugely successful Indians in every corner of the globe. Whether working as computer programmers in Silicon Valley, farmers in Western Canada, shopkeepers in England, or traders in Southeast Asia, Indians are harder working, more entrepreneurial and more committed to education than almost any other ethnic group in the world. Why then is India still so poor? Why does a nation so rich in human resources still see millions of its citizens consigned to crashing poverty and deprivation? The prickly desire of the Indian political class for self-sufficiency and lack of political will to move rapidly and fundamentally alter the structure of their formerly statist economy has led to continued poverty, economic stagnation, and a Diaspora of its best and brightest citizens. Instead of flourishing under the Nehruvian model, much of India has wallowed in its so-called self-reliance, which is more of a self-defeating insularity. Therefore, it is clear that more of the same is not the answer to any of India's problems.

Having said that, in all fairness Prime Minister Vajpayee and his BJP-led coalition government are to be commended for the steps they have taken. In less than three years in office, they have some important achievements, not the least of which is changing the stereotype of the BJP--they have shown themselves capable of responsible governing. Their achievements include working to stabilize their relationships with Pakistan and China, partially liberalizing India's financial services sector, and enacting sound budgets. While the tragic and devastating earthquake in Gujarat is a complicating factor, a clear indication of India's progress and intentions on the economic front is the Vajpayee government's submission of its third annual budget in February 2001. The Bush administration should pay careful attention to the budget submission as a barometer of where India is going.

Although our security interests are converging, especially with regard to China and the rise of Islamic fundamentalism as a destabilizing force across Asia, significant disagreements remain, particularly on nuclear nonproliferation issues. In the West, especially in the popular media, many have begun to view nuclear weapons in philosophical terms. They are thought of as evil by definition, and it is difficult for some to comprehend why any thinking people would want them. The Indians, however, see nuclear weapons as a matter-of-fact, efficient alternative to maintaining millions of men under arms protecting their long and dangerous borders with Pakistan and China. Indians have little patience for anyone who does not see this their way. They think that no one who understands their neighbors or their recent history can rationally expect India not to have a nuclear arsenal. They also bristle at what they perceive to be a U.S. double standard in maintaining the world's largest nuclear arsenal, while preaching the virtues of non-proliferation to the rest of the world. While their decision to go nuclear was a mistake, I think it is very important to understand what that says about how India perceives its place on the global stage. The Bush administration should be prepared to talk realpolitik with a clear view of, though not necessarily agreement with, the Indian perspective. Indian leaders must realize that just because India is now a member of the nuclear club, that fact is not by itself a sufficient basis for a mutually constructive relationship.

Let's hope that the good will between India and the United States generated after President Clinton's visit is durable, real, and sets the stage for a new era of progress and profit. I hope that twenty years from now, a new American president won't have to rediscover India and its vast potential once again.

Note: The most recent ,Union Budget for 2001-2002 released by Finance Minister Sinha is just fine. The budget was cheered by financial markets, and it does take some important steps in the right direction by increasing foreign investment limits, speeding up privatization of government owned companies, and modestly pruning the gargantuan bureaucracy. But, once again, is this a case of India doing the rights things, but not fast enough? It is still too early to know for sure. However, this budget is not being described as bold or a dramatic departure from previous policy.

Foreign Direct Investment -- India Versus Competing Emerging Markets

The longer India takes to reform, the farther and farther it is going to fall behind other developing nations such as China, Thailand, and Argentina, just to name a few.

China (data shown in millions)

1995    35,849
1996    40,180
1997    44,236
1998    43,751
1999

Foreign direct investment, net inflow (current US$)

Denotes FDI (current US$) in China from 1995 to 1999. Exact data for
1999 were unavailable but can be approximated as similar to that of
1998.

Source: The World Bank Group

Thailand (data shown in millions)

1995     2,068
1996     2,336
1997     3,746
1998     6,941
1999

Foreign direct investment, net inflow (current US$)

Denotes FDI (current US$) in China from 1995 to 1999. Exact data for
1999 were unavailable but can be approximated as similar to that of
1998.

Source: The World Bank Group

Argentina (data shown in millions)

1995     5,279
1996     6,513
1997     8,094
1998     6,150
1999

Foreign direct investment, net inflow (current US$)

Denotes FDI (current US$) in China from 1995 to 1999. Exact data for
1999 were unavailable but can be approximated as similar to that of
1998.

Source: The World Bank Group

India (data shown in millions)

1995     2,144
1996     2,426
1997     3,577
1998     2,635
1999

Foreign direct investment, net inflow (current US$)

Denotes FDI (current US$) in China from 1995 to 1999. Exact data for
1999 were unavailable but can be approximated as similar to that of
1998.

Source: The World Bank Group

Note: Table made from a line graph.

Ed Rogers is Vice Chairman of the Washington, D.C. government affairs firm Barbour Griffith & Rogers, Inc., and President of LEHI Partners, LLC, an investment company. He worked in the White House for Presidents Ronald Reagan and George H.W. Bush.