Thirty years ago, Nobel laureate Simon Kuznets commenced his classes saying that there were four types of countries: developed, developing, Japan and Argentina. By including Argentina as a separate category, the eminent economist was merely highlighting the hopeless status of what was once a potential global powerhouse. Critics believe that if Kuznets were to repeat his prognosis, he would include India alongside Argentina.

Harsh words indeed. But this is the worst case scenario inferred from US Ambassador to India Robert Blackwill's pronouncements recently at the Indo-American Chamber of Commerce. Many believe that the Dabhol imbroglio and years of government inaction on the policy front have mired India's once bright prospects for being a destination of choice for Foreign Direct Investment (FDI).

"It's a win-win move, may be the most important step taking place." Michael Clark, executive director, USIBC

Seemingly stung by these remarks, the Indian Government seems to have initiated a flurry of second generation reforms, which have not only caught the fancy of the domestic bourses but also given a wake up call to weary foreign investors. Though yet to digest the full import of the moves, many of them saw disinvestment as a bell weather and hence a good means of kickstarting the country's economic fortunes.

"If disinvestment does take off, it will be very good for the economy, essentially a four-fold impact. It will raise revenues, reduce the drain on the exchequer, reduce the weight of government in the economy which a McKenzie report places at 43 per cent and strengthen the capital market," says Michael Clarke, executive director of US India Business Council (USIBC). "A win-win move all round. Seen in this context, it may be the most important reform measure taking place."

"The Government should do away with intra economy distortions." Hardeep Singh, president, Cargill Seeds, India

The nature of the latest steps-attempting genuine privatisation-would also put to rest claims that the Government had been pushing for disinvestment as a means of alleviating its fiscal problems. In a communique dated February 6, the global rating agency Standard and Poor's said, "The Government will likely sell its stake in several dozen more enterprises over the coming years, compelled by fiscal needs. Political resistance to privatisation from unions, bureaucrats, and politicians is eroding slowly."

US lawyers and professionals also believe that the moves went a long way in restoring credibility to the Indian Government, which was being viewed with increasing suspicion for its failure to push reforms on the one hand and even dither on implementing some of its earlier decisions. "The recent privatisation efforts with respect to VSNL and the clarifications on the 'rules of the game' by creation of new legislation replacing outdated policies could make the communications sector very attractive to foreign investors," says Mark Riedy, chairman of South Asia Practice, Thelen Ried & Priest LLP. And, Riedy should know having worked for 22 years with projects in India (and lived in India for six of the last 12 years) and having been involved in the financial closure of eight (including Dabhol) out of the 14 private power projects.

"The new rules could make the telecom sector attractive to investors." Mark Riedy, chairman (South Asia), Thelen Ried & Priest LLP

Riedy is among those professionals who had actually seen a change in the nature of their work. "Where earlier my law firm's representation of clients involved the development, financing and construction of major projects and closing of significant transactions, we are now involved in significant arbitration and litigation to unwind joint ventures that once had great potential," says Riedy. "The heydays were 1992-97, and after that investment started peeling off. Take Dabhol for example. The Indian Government must live up to the contracts they committed to and structured under rules that existed at the time of the signing of those agreements. The world saw it as a measuring point."

The picture is starker when contrasted with China, which lacks a mature legal system and also has language barriers. Clearly the incentives, rather the disincentives, in India outweigh these handicaps. "India's restrictive industrial policies, including those reserving the production of many such consumer goods to domestic producers employing labour and capital below very low, arbitrary thresholds set by the Government effectively deter similar FDI," writes Joydeep Mukherji in the latest alert put out by Standard and Poor.

Concurring with this surmise, Indophile Collette Mathur, head of the Annual India Summit at the World Economic Forum (WEF), adds, "India has a problem. It is not able to attract serious FDI. It is still too complicated to get in and there are too many problems. But, India has also not done its homework to project itself adequately. There are good stories of foreign companies investing and making good profits in India."

Take Ford, for example, which is building on its successes in India. Having established a new, fully integrated auto manufacturing facility in 1999, Ford India successfully launched the Ford Ikon, a new global model designed specifically for the Indian customer. The Ford Ikon, says a spokesperson for the company, has also been successfully exported to South Africa and Mexico, establishing Ford India as the leading auto exporter from India.

Yet the Government is peeling away FDI from big ticket infrastructure projects that have dominated the mind space of the foreign investor. Strapped for resources, the only way up for these infrastructure ventures was through FDI. It was in this context that Dabhol was billed as a trendsetter and has willy nilly become the icon (for entirely the wrong reasons) for wary potential foreign investors.

"Watch for the experience of existing investors. They are the best ambassadors," says Hardeep Singh, president of Cargill Seeds, India. "The objective is to not just attract new guys, but try to retain the existing players. There should be a level playing field and the Government should create an infrastructure such that we can operate ethically."

Yet at the same time, it also appears that there is a regional story that bucks the abysmal national record. Here again the good stories are not in infrastructure, but in emerging frontiers such as biotechnology, which are premised on India's established success in information technology.

The just-concluded WEF meetings at New York showcased this trend. Even while the spotlight was on the swanky interiors of Waldorf Astoria in midtown Manhattan, Andhra Pradesh Chief Minister N. Chandrababu Naidu, accompanied by his entourage of officials and two cabinet colleagues, was holding fort in the less glamorous interiors of Radisson Hotel located just two blocks away.

The minister has since his first visit to Davos in 1999 realised that the Mecca of schmooze offers a good platform to hawk his wares. After hogging global and national limelight with his cyber ventures, the chief minister is now focusing on FDI in biotechnology and the Andhra Pradesh Special Economic Zone (APSEZ) being set up at a 9,000-acre, duty-free, commercial enclave near Visakhapatnam. While he used the four days of the WEF to forge a series of MoUs with top several biotech majors, including Monsanto, he also used the moment to kick off road shows for the APSEZ. "We plan to invest more in India. We are getting support for BT cotton (insect-resistant cotton) and biotechnology projects from the Centre and states like Andhra Pradesh and Karnataka," Charles M. Martin, vice-president, corporate communications, Monsanto, explained immediately after the signing of the MoU.

Also gaining the mind space of US investor is the emerging possibility of shifting their back offices to India-a trend kicked off first by General Electric (GE). The Washington-based USIBC has created a programme that will kick off at the NYSE on April 3, which will "pair-up or marry" Indian companies thinking of being outsourced too with US companies who have outsourcing requirements. USIBC, a member of US Chamber of Commerce which has 3 million members, has a tremendous resource of potential outsourcers that should interest Indian outsourcing companies.

"The investment experience in India has been phenomenal. There are compelling advantages to investing in India. The credibility and experience of our engineering centre is very high. Our main reason for investing in India is the top quality products we can produce because of the top talent in India. Additionally, in looking at cost, work that is done in India's engineering centres is as good as anywhere else in the world but just at a quarter of the cost," says Jay Puri, vice-president of the Asia Pacific region for Sun MicroSystems.

Yet there are those who caution that this too might end up as a chimera if sufficient caution is not exercised with the evolving tax rules in the country. While Blackwill flagged the anomalies in import tariffs, problems have also surfaced with the treatment of outsourcing activities by foreign companies. "A cornerstone of foreign country taxation is to assert jurisdiction over companies' profits where those companies have a physical presence in those countries. Foreign companies that outsourced to Indian companies and did not have a physical presence necessary to create a permanent establishment were deemed to have a 'virtual' presence by the use of electro-magnetic airwaves, allowing Indian tax authorities to assert jurisdiction over profits for tax purposes," says Riedy.

It is critical, experts caution, that the Government be careful in its pursuit of transfer pricing-the rules for which will begin to be implemented from April this year-violations and not become over aggressive to create huge tax revenues. It could adversely impact the growing outsourcing business, they add, which in the long run will create tremendous revenues for Indian companies and their employees.

There are others who believe that such Government intervention should instead focus on ironing out the existing contradictions such that market forces are given greater play. "The Government should have the political will to do away with intra economy distortions and get our act right on relevant infrastructure. Though telecom has been a success, much more needs to be done. The opaqueness of policy should be addressed and distortions should be done away with," says Singh.

Cargill Seeds, which has been exporting grains, has been at the receiving end of archaic government rules that require them to mandatorily route their merchandise through government agencies. "India imports more than 95 per cent of its phosphate. Logic demands that the country import from the cheapest source. Instead, the Government gives incentives at a huge cost to the exchequer through the use of indirect subsidies. This leads to market distortions and translates to absolutely no benefit to the farmer," adds Singh.

Ten years after reforms were first initiated, the global investor continues to look at the Indian Government for reassurance. The growing political proximity between the US and India seems to have given a fresh opportunity for the latter to renew its case as an attractive global investment destination. It will have to be seen whether the latest moves by the Government do give wind to the sails of economic dialogue between the two countries.