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| Feature: Eastern Promise |
A Passage to India
Saritha Rai
09/01/2005
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The present government, although democratically elected and
striving to foster a measure of economic transparency that would be unthinkable
under China’s authoritarian regime, seems ambivalent about shedding all of its
barriers to foreign ownership. The bureaucratic tangle has become an
embarrassment within the country, especially since the publication last year of
Governance and the Sclerosis That Has Set In, a book by Arun Shourie, a former
World Bank economist and the country’s privatization minister from 2000 to 2004.
Shourie’s scathing account includes his recollection of a yearlong wrangle he
witnessed during which steel ministry officials debated whether it was ever
appropriate to use red or green ink to sign documents.
TOP VIEW
Although some of the Indian
government’s economic
liberalization efforts have
stalled, there have
been moves to
give foreign investors better access to the
property
sector
and to spur entrepreneurial enterprises generally. Investors
willing to pay the high costs of entry are likely to reap
significant
rewards in
the next decade, not necessarily from
the much maligned
outsourcing companies,
but from technology,
consumer products and
infrastructure projects demanded by
India’s growing number of domestic
wealth holders. |
Nevertheless, Singh,
a pro-reform politician who is credited with ushering in the current environment
of economic transformation during his stint as India’s finance minister in the
1990s, has seen his popularity decline since he became the country’s chief
executive last May. Singh’s government has only been able to push through a few
measures, such as raising foreign investment ceilings in telecommunications,
banking and property. The communist parties that support his government stiffly
oppose such liberalization. His slow progress has been reflected in the
performance of the Bombay Stock Exchange’s Sensex index, which has risen only 31
percent in the first year of his government, compared to 127 percent in his
first year as finance minister, when he initiated his reforms.
Former
investment banker Norman Prouty, who has lived and worked in Bangalore since the
late 1990s, was also a cofounder of ICF Ventures. In that capacity he has helped
to launch a number of entrepreneurial ventures in India, and he clearly feels
that there are significant opportunities for investors: He has invested millions
of his own capital into an ICF fund that he has incorporated in Mauritius. India
imposes capital gains taxes on foreign investors, so nearly all investment funds
incorporate in the small island off the coast of southern Africa, which has a
tax treaty with India that grants exemptions to this levy. ICF claims to offer
its investors average annual returns above 35 percent—slightly more than the
average annual return for an Indian private equity fund—and is so successful
that the principals anticipate limiting the next round of funding only to
previous participants.
Homegrown Wealth
The expectation that the economy will grow by at least 7
percent this year, despite Shourie’s “sclerosis,” attests to the success of the
technology sector and the growing pool of wealth it has generated. The services
sector, including telecom and IT outsourcing, has been responsible for close to
half of the 6.5 percent average annual growth rate over the past three years.
But the greatest upside in the decade ahead is likely to be found in industries
that address the development of the domestic infrastructure and consumer market.
The manufacturing sector is expected to grow by 8.9 percent this year, with 90
percent of its output aimed at the domestic market, according to government
figures.
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