Briefing Paper : U.S.-India Trade Poised for Takeoff, Many Say : Great Potential

By JOHN-THOR DAHLBURG

Dec. 6, 1994 12 AM PT

TIMES STAFF WRITER

Americans and Indians in business and government see a huge surge in two-way business and trade just over the horizon. Last month, Sen. John F. Kerry (D-Mass.) led the heads of a dozen companies based in his state to New Delhi and Bangalore to drum up business, and he was enthusiastic about what he found. “If India continues down the road on the economic reforms, there will be almost more interest in doing business here than in China, because of the democracy, the legal system and no language barrier,” the senator said.

“India has all the potential -- the biggest market, skilled labor, all resources, all facilities, liberalization, even simplification of various rules and regulations,” N.S. Jain, deputy secretary of the Indian Federation of Chambers of Commerce and Industry, told a University of Pennsylvania seminar on Indo-U.S. business.

When U.S. Ambassador Frank G. Wisner called on leaders of Communist-run West Bengal in Calcutta, the longtime enemies of U.S. “imperialism” were keen on finding out how they could open the spigot to greater American investment in their state.

Burgeoning Interest:

Prime Minister P.V. Narasimha Rao’s freer market policies and openness to foreign capital and business participation have so piqued the curiosity of American companies that East Coast seminars on the subject this fall were oversubscribed--”you couldn’t get in the door,” recalls Undersecretary of Commerce Jeffrey E. Garten. He calls India “the last of the big emerging markets to open its doors to international commerce in a significant way.”

Garten, commerce’s point man on international trade, predicts a sharp rise in direct foreign investment in India over the next five years, at least $5 billion to $10 billion annually. Conditions are ripe for a “gigantic leap” in the already much-improved Indo-U.S. business climate, Garten says, but he warns that America, now India’s No. 1 investor, must be aggressive or risk losing on a “competitive battleground.”

To sing the praises of U.S. business and industry and help break the ice for contacts and contracts, Commerce Secretary Ronald H. Brown is scheduled to fly to India in January with 25 CEOs in tow. Expected later in 1995: Treasury Secretary Lloyd Bentsen, Defense Secretary William J. Perry and Energy Secretary Hazel R. O’Leary.

Where the Markets Are:

Two-way trade is expected by the Commerce Department to hit $7.8 billion in 1994, with plenty of room for more expansion. Although the two countries possess one-fifth of the world’s population and a quarter of its economic output between them, just 0.6% of made-in-U.S.A. exports went to India in 1993 and the country has absorbed less than 0.3% of American foreign investment.

S.K. Bhargava, president of the Confederation of Indian Industry, is so bullish about the future that his organization is drafting an action agenda that sets a target of $20 billion by the turn of the century.

Already, according to S.S. Ray, India’s ambassador to Washington, U.S. companies accounted for a third of the $6.6 billion in direct foreign investment approved by Indian authorities in the three years ending last July, while 35% of the more than $13 billion invested from abroad in Indian mutual funds and other equities came from Americans.

U.S. officials see power generation, telecommunications, transportation, financial services--including insurance--and food processing as priority areas where India can profit from American capital, technology and know-how.

Don Reed, president and CEO of Nynex-New England, finds “enormous opportunity” for his Boston-based Baby Bell. India now has just 0.8 telephones per 100 people, he says. Nynex-New England, which is working in Bangkok, Thailand, to install 2 million phones, is looking at five or six Indian companies as potential partners in a similar, $300-million to $500-million scheme to string cables and provide basic telephone service in one of India’s metropolitan areas.

“Nynex has looked at India on a couple of occasions and walked away,” says Reed, remembering the old “license raj” days when government officials had a chokehold on trade and industry. “But we’re back, because the rules are changing.”

Problems Linger:

But many Americans say India, defined as “socialist” by its 1950 constitution, is not bringing itself into the international mainstream fast enough. That cautious pace frustrates visiting business people and may, they say, compel them to take their investment bankrolls and attache cases crammed with proposals elsewhere.

Some frequent gripes: Westerners complain that the process of awarding contracts is secretive, leaving room for extortion and favoritism. Labor regulations dating from India’s faded love affair with state micro-management of the economy remain on the books, making it often illegal to fire delinquent workers or trim payrolls.

And, notes Kerry, “the level of bureaucracy is intimidating to some and daunting to others,” with the government still a powerful economic player. For instance, Department of Telecommunications guidelines have been modified to allow foreign firms to hold a 49% equity in private ventures providing basic phone service, but the lucrative long-distance market is still a state monopoly.

“That’s a stumbling block right now, to be honest,” says Reed of Nynex-New England. “We’re going to invest our money where, frankly, we’re going to get the best return.”

Illiteracy and Infrastructure:

The Achilles’ heel of India’s economic growth consists of its creaky, inadequate ports and its telecommunications system and transportation network, Garten says. Over the next six years, he predicts, India will need more than $100 billion in foreign capital to rebuild them or risk seeing plenty of business go to better-equipped countries.

“The infrastructure has to be up to world-class standards, or the capital is not going to come,” the U.S. official says.

India’s signature of the final draft act of the GATT Uruguay Round in April committed it to enacting stronger patent legislation by 2005. American pharmaceutical, chemical and agricultural companies complain that Indian competitors for years have been illegally copying their drugs, compound fertilizers, herbicides and other products.

India has 10 years to bring its intellectual property laws in line with GATT, but U.S. officials would like to see them move faster. The lack of protections makes some U.S. firms hesitant about breaking into the Indian market.

Another handicap to increased U.S.-Indian commerce may lie in the nature of the labor force. Although India boasts the world’s largest pool of scientific and engineering talent after the United States and Russia, 52% of its adults cannot read. Another potential Asian business partner, Vietnam, “is way ahead on basic skills,” Kerry finds.

Mostly Bullish:

By 2020, the World Bank forecasts, India will be the world’s fourth-largest economy. The size of India’s “middle class” is debated (as is the meaning of the term), but most agree it is enormous. Garten pegs the pool of potential consumers of foreign-made goods and services at more than 150 million already, each boasting annual purchasing power of more than $4,000.

Claude Smadja, the World Economic Forum’s senior adviser for Asia, predicts economic growth in India of 5% to 5.5% this year (against 4% in 1993) and foreign capital in-flows of $6 billion to $8 billion. Export growth is projected at 15% this year but is still hurt by shoddy quality in some areas and tardy deliveries.

Business Partners

America imports far more from India than it exports. But India’s middle class represents a huge potential market.

* U.S. trade deficit with India

(in billions of $$) * U.S. share of India’s 1994 imports

Fertilizers: 25%

Aircraft / parts: 36%

Electrical power equip.: 28%

Electronic components: 51%

Oil equipment: 30%

Computers: 35%

Telecommunications equip.: 28%

Scientific instruments: 39%