INTERNATIONAL BUSINESS : Making an About-Face, India Now Courts Foreign Investment

NEW DELHI — ISSUE: Daniel Patrick Moynihan, the former U.S. ambassador here, once asked, “What does India export but communicable diseases?” Today he would have to revise his list. In the throes of economic reform, India has seen the value of its exports rise 20% this year. Top-quality Basmati rice and prawns, leather and leather goods, cotton and textiles, 25,000 tons of grapes and half a million tons of steel have gone to China.

Since July, 1991, the Indians have been dramatically overhauling rules to woo foreign investment. Outsiders can now control Indian companies and invest in practically any sector. Foreign institutions can buy Indian financial instruments and try their luck on the uproarious Bombay Stock Exchange.

“Huge investment is in the offing,” predicts S.L. Rao, director general of India’s National Council of Applied Economic Research, who has watched a parade of international bankers and economists troop through his office. Among U.S. corporations already present in India or reported to be on the way: Motorola, Hewlett-Packard, Kellogg, IBM, General Motors and DuPont.

BACKGROUND: India became independent under the tutelage of British-educated nationalists who saw in Fabian socialism and state planning a way to secure sovereignty and promulgate justice for hundreds of millions of poor. It didn’t work.

The watchwords were import substitution , development of locally made products to obviate the need for imports. Moreover, India’s leaders viewed Westerners trying to do business in India as a potential source of foreign domination.

The world’s second-most-populous nation set out to become self-reliant. It erected a wall around itself, with tariff rates soaring as high as 350%. Direct foreign investment averaged less than $100 million yearly until 1991. Cordoned from competition and fed with government funds, state-owned industries had little incentive to make better goods or to export.

By the 1980s, these flaws had become alarmingly apparent. When Iraq invaded Kuwait, India’s import-export imbalance reached critical mass. Remittances from Indians working in the Persian Gulf, a valuable source of dollars since exports were so few, dried up, while oil, which constituted one-third of all imports, shot dizzyingly skyward in price. Inflation by 1990 had risen to almost 16% a year.

OUTLOOK: As a result of the pro-export policies of Finance Minister Manmohan Singh, inflation has been pulled down to about 8%, and exchange reserves have climbed nine times in three years. Although the collapse of the Soviet Union deprived India of the market that had absorbed more than 20% of its exports, producers rapidly adjusted. Tariffs have been slashed to an 85% maximum and should be be reduced even more.

India’s finance minister promises more: The second phase of his program will be “tougher,” with the goal of winning more markets abroad, Singh said this month.

Remaining challenges are daunting, but Singh’s achievements are impressive. After a nearly 20% devaluation, the rupee has been stable relative to the dollar. The United States has invested $1.5 billion here, placing it atop the foreign investors’ list. Indians want more: “We are very supportive of a strong U.S. presence in India,” said Kanwal Sibal, charge d’affaires at India’s Embassy in Washington.

STRATEGY: Some economists believe Singh tackled the easy part first and that the road ahead will be rocky. Pressured by powerful lobbies and entrenched constituencies, India’s government has fared poorly in cutting food and fertilizer subsidies and in “de-socializing” industry. Investors have been allowed to buy shares in some state-owned giants, but India has delayed full privatization. The fiscal deficit was supposed to be cut to 4.7% of gross domestic product this year, but economists say it may be as high as 6%.

The government reaped only a 2.5% return last year from huge funds it sank into state-owned plants. Those facilities, archaic by world standards, have just begun restructuring to meet new global challenges.

Perhaps the acid test is what Singh’s policies do for ordinary Indians. The literacy rate is only 52%, life expectancy 58 years. India has one of the highest infant mortality rates in the world. Its government operates five-star luxury hotels but can’t provide all of New Delhi with clean drinking water.

“It is manifest that India is determined to change for the better,” Singh pledged this month.