How risky is business in India?
Until Nov. 26 the strongest force pushing India forward was a mix of good fundamentals and that intangible something that industry calls "sentiment." Forged in the years of 9 percent growth, this euphoria inspired Indians to economic greatness and lured outside investors eager to be part of the Indian miracle.
Then the shooting started in south Mumbai. The three horrendous days that followed laid bare the gaps between India's image and reality, sparking a nationwide introspection about the nation's future. The fear is that India's mounting problems could drag the country back to its pitiful past. Its governments, despite a manufactured public image, have always been unwieldy; its economy, despite the plenty of the boom years, is premised mostly on future potential; and its much-flaunted stability is no such thing.
India's fragility is revealed by a pattern of diffused violence — a bomb here, a killing there — that goes unnoticed even in India. Most outsiders (and most investors) don't realize how dangerous a place India can be. Since 1993, when 13 bomb blasts in one day killed 257 in Mumbai, just over 29,000 people have died in terrorist attacks, including insurgencies in Kashmir and the Northeast, according to a BusinessWeek analysis of data from the Home Affairs Ministry. Thousands more have died in anti-Muslim riots. At least another 4,500 have perished since 2002 in a Maoist rebellion that simmers, and sometimes boils over, in the mineral-rich region of Chattisgarh, where foreign companies plan to invest heavily.
Just after the Mumbai attacks, three people were killed in a train blast in Assam, a northeastern state that produces more than $2 billion worth of tea each year, most of it exported. "It is not just this one unprecedented attack in Mumbai," says Chandrajit Banerjee, director general of the Confederation of Indian Industry, India's most influential trade lobby. "Across the country we see ... violence."
It's quite a contrast to the strengths India has used to attract global capital. Engineers and programmers are first class. Skilled, dedicated workers toil for wages much lower than in the West. The nation's blend of entrepreneurial spirit and democratic values has challenged the more rigid China model. A top-notch executive class boasts chief executives like Ratan Tata, chairman of the Tata Group and innovator in categories from autos to hotels. Tata owns the Taj Mahal Palace & Tower Hotel, which was ravaged in the attacks and which he vows to rebuild.
These strengths still attract investors. But foreign companies are not immune from the violence. In Orissa on the east coast, where billions in foreign investment lie tied up, Korean companies like steelmaker Posco have had executives kidnapped and land promised to them but never delivered: Protesters wield slogans and weapons to keep earthmovers at bay. In New Delhi, the Indian CEO of an Italian company's subsidiary was killed by a mob of employees angry over layoffs. And Patrick Cescau, CEO of consumer-products giant Unilever, narrowly escaped death in the massacre at the Taj Mahal hotel where he was dining with colleagues.
Seeking protection — fast
If south Mumbai is visited by violence again, the 110-plus multinationals with regional offices there could be targets. Citigroup, Bank of America, ABN Amro, HSBC, Goldman Sachs, Morgan Stanley, JPMorgan Chase — all have offices there. "The targets identified demonstrate that the intention is to create panic and shatter the confidence of investors in India and global investors coming to India," says Habil Khorakiwala, managing director of Indian drugmaker Wockhardt. The private equity arms of Morgan Stanley, and Englefield Capital, which have offices in the Oberoi Trident Hotel, are looking for new premises in the city, according to an investment banker. No wonder Raghu Raman's phone has been ringing nonstop. An ex-Indian Army man, Raman is CEO of Mahindra Special Services Group, which offers security to blue-chip clients like Hindustan Unilever, Merrill Lynch, ABN Amro, HSBC, and others, many of whom want to beef up their security. Prospective clients also want protection fast. Raman says some multinationals have temporarily flown their top expat execs out of India.
Indian executives are even more alarmed than the multinationals. "We virtually handed Mumbai on a platter to the terrorists," says Rahul Mehta, managing director of Creative Group, a textile exporter in Mumbai that supplies clients such as J.C. Penney and Target. Referring to reports that intelligence agencies had predicted an attack, he adds, "[The government] was forewarned, so why didn't they act on it? We've been ravaged by terror attacks since 1993."
Anger at the government
In Mumbai, anger courses through the city. "How can I invest more in a city which does not protect me?" asks Abhay Mansukhani, who makes auto parts. Now he's tempted to relocate: He's holding off expanding his plant in north Mumbai as he contemplates a shift to Pune, 124 miles away.
Some executives, undeterred, are staying put. Gautam Patel, managing partner of Battery Ventures, was on a conference call when his window shattered from an explosion outside the Oberoi. He's furious with the government, but he's not budging: "Let's do something to get Bombay back on its feet," he says.
What concerns managers like Patel and Mansukhani is that the government they depend on for so much is so weak. The attacks of the past two years have made Prime Minister Manmohan Singh's administration appear incompetent. Inflation has eaten away at the meager gains of the poor, who in India vote far more reliably than the middle class. Promised reforms have either been checked by the necessities of coalition politics or stalled in the Kafkaesque bureaucracy called the Indian Administrative Service, which pretty much runs the country.
And the tentacles of the global credit crunch have spread into India's relatively well-capitalized banks, slowing economic growth to 7.6 percent this quarter from more than 9 percent earlier. Exports dropped 12.1 percent in October, versus a 51 percent jump in the same month last year. "It's a crisis situation," says Ananthasubramaniam Prasanna, chief economist at brokerage ICICI Securities. But he adds: "The focus now is on internal security and not fiscal policy." Worse, the prospect of a national election in April has reduced the government to lame-duck status.
Singh's government has promised swift action. At least three senior ministers, including one in charge of security, have quit. Singh has suggested creating a new agency that could react swiftly to an attack and increasing funds for commandoes.
Loyal tech clients
Yet if a conflict with Pakistan ensues, or bombings continue, or economic reforms remain frozen, or a government collapses — all things that have happened to India in the past 10 years — the euphoria could dissipate completely. "Fear of physical danger to employees, executives, and property can muddy the sentiment toward India," says Gunjan Bagla, author of "Doing Business in 21st Century India" and a consultant to U.S. companies in India. "To me the tipping point would be if foreign executives start to believe that the government is not willing to make changes to correct its inabilities."
Because India's economy is still a pidgin blend of Soviet-inspired socialism and entrepreneur-driven capitalism, business needs government to create a climate where investments can take root. In southern India, especially in Bangalore, strong governance and education helped create the $64 billion outsourcing industry almost entirely from scratch. On Dec. 2, Subramaniam Ramadorai, chief executive of Tata Consultancy Services, the top tech services outfit in India, left work to join a candlelight service for Mumbai's dead. Then it was back to business-almost-as-usual. "Our customers say they stand by us," he says. "Nobody has said they want to do less in India."
But in the northern states of Bihar and Uttar Pradesh, nearly 500 million people endure in an economic wasteland created by political turmoil, extreme corruption, India's highest crime rate, and its lowest per-capita income. Industry, local and foreign, has fled those states, or never dared venture there. Economic growth is less than half the national average. The people are among India's most illiterate, with a life expectancy worse than that of sub-Saharan Africans.
Not long ago, almost all of India resembled these two states. Even when reforms opened up much of the economy in 1991, real, measurable growth was held back for years as coalition governments collapsed, a border conflict with Pakistan threatened to spread, and scandals eroded faith in the financial markets. Only in 2001, when a stable government focused on the economy with a brand message called "India Shining," did things take off.
Which India will prevail — the India that nurtures global industries and rising affluence or the India of stalled hopes and endemic violence? A year ago the answer was clear: The new India would win. That is probably still true, but India now faces a struggle.
Terror in India: The Political Fallout Spreads
The investigation of the Mumbai terrorist attacks continues, but pressure is increasing for the Indian government to react forcefully.
The political fallout from the terrorist attacks in Mumbai is roiling India. As funeral pyres burned on live television and mass candlelit vigils turned into sober protests against the government's perceived intelligence failures and mishandling of the attacks that left as many as 175 people dead (BusinessWeek.com, 11/27/08), pressure mounted on the Indian government to react forcefully.
Tensions are rising with Pakistan, as Indian officials point to ties between the terrorists and forces inside India's longtime rival. In an off-the-record meeting with BusinessWeek and representatives of two newspapers, a senior official at India's Research & Analysis Wing, the country's equivalent of the CIA, shared transcripts of text messages and e-mails that were sent to the gunmen inside Mumbai's Taj hotel, where dozens of people were killed in a 60-hour siege. The messages, some in Urdu and purportedly from phone numbers registered inside Pakistan, included explicit military-style instructions to the gunmen to retreat to different wings of the hotel and referred to the gunmen as Team A and Team B. Some were congratulatory notes.
Because the Indian intelligence official did not allow reporters to make copies of the messages, BusinessWeek could not independently verify their authenticity. However, CNN-IBN, a TV channel, has broadcast call logs from satellite phones that include several phone calls to Karachi and Jalalabad, both in Pakistan.
India Inc. Reacts
Even as the investigation continues, India's business community is clamoring for quick and decisive action (BusinessWeek.com, 11/28/08). In Bangalore, which was the target of a smaller bombing last year, CEOs of outsourcing, IT, and biotech firms met with the state government and asked for, among other things, permission to arm their security guards with more than just handguns and nightsticks. India has strict gun-control laws. "Our security services are meant to protect property, not to protect lives," says Kiran Mazumdar Shaw, the chairman of Bangalore-based Biocon, India's largest biotechnology firm, who was at the meeting. "As employers, our employees are our responsibility. While the government does what it can, we have to do what we can."
With India's Congress-led coalition facing elections just months from now, the purging of leaders continued through the weekend and into Monday. There have already been four high-profile resignations at the state and national levels, including Shivraj Patil, the home minister in New Delhi. Other resignations include chief minister and deputy chief minister of the state of Maharashtra, of which Mumbai is the capital. More resignations, including those of the 75-year old National Security Adviser M.K. Narayanan, are still being considered by the government.
It's unclear whether that will be enough to quell rising anger, both public and private. When Patil, whose purview as Home Minister includes the Indian Police Service, offered to resign at a Saturday night meeting of the country's leadership, his offer was met with pin-drop silence. "Not even his oldest friends stood up to support him," said an official who was at the meeting but declined to be identified. "There was relief he offered to do it before anybody had to demand it."
Patil's successor is a name well-known in economic circles: Palaniappan Chidambaram, the Harvard-educated Finance Minister who helped usher in major reforms in the past few years. Over recent months he has been battling runaway inflation and a global financial crisis that has soured India's economic boom.
An Unappealing Job
Chidambaram's appointment is seen as an offering to India's business community, which has a great deal to lose during a period of political instability.
Jews Targeted in Mumbai
The Chabad House in Mumbai, where terrorists murdered the young rabbi, his wife and several others during last week’s attacks, is relatively new. Six years ago, the first time I spent a Shabbat in the city, there was no Chabad yet in Mumbai. There was the historic synagogue in the Fort area, down the street from the Sassoon Library, which is where I went to pray. It was an impressive old building, with a baby blue facade and a large but a bit dilapidated interior. (The Jewish community in Mumbai, the Bene Israel, had seen better days, as many people had left for Israel or elsewhere.)
On that Friday night, I was one of eight men - a problem because you need ten men to make a minyan, the quorum necessary to say kaddish and some other prayers. The situation seemed bleak, and then suddenly arrived a group of several dozen people from India’s northeast, home to a group called the Bnei Menashe that claims to be descendants from one of the Ten Lost Tribes.(The claim is not as strange as it sounds. See Hillel Halkin’s excellent book, “Across the Sabbath River: In Search of a Lost Tribe of Israel.”) They were on their way to Israel and were staying the weekend in Mumbai. Having received much of their formal Judaism education from Ashkenazim who help people claiming connections to the Jewish people through the Ten Lost Tribes, the visitors didn’t have much in common with the local Jews: The men wore white shirts, black trousers and wide-brimmed black hats, the standard uniform of haredim in Brooklyn or Jerusalem, not the secular Jews of Mumbai; the visitors also had different styles of singing some of the songs, since the Bnei Menashe had long lived in isolation and never had any connection to Jews in other parts of India. (At one point, one of the local Jews turned to me, a puzzled look on his face, looking for explanation from the American of what these newcomers were doing.) Still, our lonely group of eight men were thrilled to get the reinforcements. Our numbers bolstered, we gladly concluded the evening prayers.
Afterwards, I asked an old-timer about anti-semitism and whether a Jew wearing a kippah (yarmulke) needed to worry while walking the streets of the neighborhood. Of course not, he told me. This was Mumbai.
Last week, while the battles at the Taj and the Oberoi were still raging, reports circulated that the terrorists were singling out Americans and Britons to murder them. That seems not to have been true, according to Oberoi executive Rattan Keswani, quoted in the New York Times. But there’s no doubt the rabbi, the rebbetzin and the others in Chabad House were targeted because they were Jews. In the Times, Mumbai native and NYU professor Suketu Mehta writes, “And in the attack on the Chabad house, for the first time ever, it became dangerous to be Jewish in India.”
