“It’s frustrating to pick up the phone to call your customer, and the line is dead. Or your shipment is delayed in customs, and no one provides answers. However, 950 million people do live and conduct commerce and make profits in India, and you can, too.” (Agarwal, Alpa; 1996: pp. 6)
South-East Asia is the place to be in today’s world. Highly successful companies and new kinds of business methods make several Asian countries famous for their fast growing markets, except India. This country, counting the 2nd world largest population, has great potential but cannot turn it into reality. Between 1960 and 1990 India’s GDP lagged far behind average level of Asian countries, with an average growth of almost 4%. Over the same period Pakistan’s GDP grew by 5% a year, Indonesia’s by 6%, Thailand’s by 7%, Taiwan’s by 8% and South Korea’s by 9% (Collyns, Charles; 1997: pp. 3).
India is often compared with China because they have many similarities: a huge market, great needs of infrastructure, telecommunication, power, transportation and investment. But China is growing in all these areas, while India lags behind. The opening of the market in 1991 was a starting point to catch up with other Asian countries. Although progress is made, the door to India’s market is still not wide open.
The country faces too many problems as a result of their past. This paper highlights in particular the problem of energy supply, a serious necessity in a growing market. The need for Foreign Direct Investment in this sector is the anomaly which is point of discussion. The paradox of India’s needs and their political behaviour will be explained by their history of government policy and a power company that became famous as a model for political trouble in India.
India, independent since 1947, is ruled by central planning, government controls, subsidies, and a public sector known for its low productivity. The government kept the market closed from the outside world. India had limited import and hardly any foreign firms. Firms that tried to enter the Indian market cancelled their plans after several years of struggling with the huge amount of governmental agencies. This was the main obstacle of the whole economy: a huge bureaucracy that absorbed money, people and regulations. The latter because every business had to negotiate with many different administrative agencies on all kinds of state levels. Papers were passed through many hands and ended up with the most powerful ones. The whole system was complicated, responsibility and power were vague. Corruption was a normal feature in doing business. The public sector also employed millions of people who earned a higher salary than employees in the production sector.
All this led to a crisis in 1991: the country had a huge shortage of money, the economy was far behind world level and more than half of India’s population lived in absolute poverty. The Congress Party realised that their five year plans (setting unrealistic objectives and creating means for meeting those) were not sufficient to keep the country going. India needed a dramatical change in government policy. Reform programs containing private sector participation, public sector disinvestment, deregulation and lowering of trade barriers changed the Indian economic and market potential in an unprecedented manner (Kanwarpal, Vishvjeet; 1996: pp. 40-50).
The Power Sector
In 1991 overall power shortage seemed to be a bottleneck for future growth. The genesis of the crisis in the Indian power sector lies in India’s policies and objectives (Kanwarpal, Vishvjeet; 1996: pp. 40-50). Policies like rural electrification and subsidies to the agricultural and domestic sectors, but also use of the power industry as an employment scheme, like any other public species!
The power industry has been state-owned since the Industrial Policy of 1956. Until the end of the 1970s the power supply was sufficient. But today the growing economy has boosted electricity demand and India is experiencing acute shortage of electricity with average shortfall of 10% and peak shortfall of 20% (Kanwarpal, Vishvjeet; 1996: pp. 40-50). Unreliable power supply means that companies have to face several power losses each day, resulting in loss of production efficiency. This serious malfunctioning of energy supply is caused by lack of investment for decades by the Central Electricity Authority, which co-ordinates and develops policies for the power sector on government level. Also badly run and badly maintenance of the power stations cause huge production costs. So not only the supply of electricity is disastrous but also the financial situation of the Electricity Boards shows huge gaps. Examples of this inefficiency in public power supply: On local level, the State Electricity Boards (SEBs) are not allowed, by policy, to cut off non-paying customers. And the latter take advantage of this slowly grind of mills within government: They don’t even pretend to be a customer and clip wires to transmission cables (Economist p.23) Almost 75% of the population is rural. Agriculture consumes 30% of the power generated in the country, but pays only one-fifth because of subsidies. The SEBs attempt to cover their losses by charging much higher prices to industrial users, but these bigger revenues rarely find their way back to the electricity boards (of course, a bill can easily be lost in a huge pile of paper!). These features are still common today, although government is working on a better allocation of energy.
The 1991 crisis, when creditworthiness was at the lowest, government decided to offer incentives to foreign companies to invest in this power sector (Kasbekar, Kiron; 1997: pp. 44). They started with the liberalisation of its domestic power sector. Private developers, both Indian and foreign, would be permitted to build and operate independent power projects, with no restrictions on foreign equity ownership. Unsurprisingly, the response was frosty. India was recovering from a severe balance of payments crisis, and international banks were hastily cutting their credit limits. (Edwards, Ben & Shukla, Mukul; 1995: pp. 28)
But one company was interested and felt a challenge in doing business with India. The ministry of power wanted a large, ambitious project that would not only serve as a flagship for its new power policy but would also supply enough fuel to a new generation of clean, efficient and modern generating plants. Planned targets to meet anticipated power shortages and expected demand would be impossible to achieve without the help of foreign capital (Edwards, Ben & Shukla, Mukul; 1995: pp. 28). So the government had to take initiative and went abroad looking for companies who were capable of handling huge projects.
They found a US company; Enron Development Corporation agreed to invest in the Dabhol project. But what was to be the largest single foreign investment ever committed in India became a big wrangle with the state-government. After signing the contract in 1992, the BJP and the Shiv Shena (leftist parties) started a campaign against the project. Enron was to develop a power plant at an estimated cost of well over $2 billion. The BJP together with the Shiv Shena, claimed that Enron had manipulated Congress leaders to approve an inflated project cost estimate for their own benefit: making super profits. The campaign, full of lies, smears and a highly efficient propaganda resulted in the victory of the BJP during the elections in 1995; the Congress Party could step aside (Kasbekar, Kiron; 1997: pp. 44). Manipulating public opinion in India was and still is easy, because the popular belief is that foreigners are intruders and take advantage of the country.
Immediately after that, the new state government announced scrapping of the project. They wanted to cancel the whole project. And that was the start of a huge political fight: after being through 30 government agencies, 170 formal approvals, nine court cases, 39 months of grueling negotiations, riots and bomb blasts, Enron is still in the newspapers (Edwards, Ben & Shukla, Mukul; 1995: pp. 28). The company did not pack and went home, but is still in India. The Asian Wall Street of 17 February 1997 wrote an article about Enron: “Enron’s professed bullishness is the best thing that could have happened for India…now the state-owned electricity board is expected in the next few months to take a 30% stake in Dabhol Power Co.” So after all, the company did not move and fought the hard way and finally won.
How can a government, after all these efforts of opening their market and deregulating business and being so dependent on Foreign Direct Investment, turn against their single top investor?
The argument used to attack Enron was that ‘the flagship’ was too expensive and therefore not profitable. But it was on government’s request that the project was built. Furthermore the government could get most value for money if they used a tender like often used in such huge projects. Like a similar project: the present Three Gorges Dam in China, which will be To view the rest of this essay you must be a screwschool member click here to become a member.
Agarwal, Alpa, ‘Profiting from India’s strong middle class’, Marketing News; October 7, 1996: pp. 6
Collyns, Charles e.a., ‘Time to let go’, The Economist; February 22, 1997: pp. 22-23
Dunne, Nancy, ‘Three Gorges Dam’, Financial Times; February 17, 1997: pp. 17
Edwards, Ben & Shukla, Mukul, ‘The mugging of Enron’, Euromoney; October 1995: pp. 28-33
Kanwarpal, Vishvjeet, ‘Power shift’, Independent Energy; July/August 1996: pp. 40-50
Karp, Jonathan, ‘Enron bids for new projects’, Asian Wallstreet; February 17, 1997: pp. 5
Kasbekar, Kiron, ‘Land of Opportunity’, Far Eastern Economic Review; February 20, 1997: pp. 44
Rohwer, Jim, ‘Asia Rising, Why America will prosper as Asia’s economies boom’, Toughstone; New York, 1996: pp. 167-203
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