NO PASSAGE TO INDIA

By John Greenwald

There was nothing remarkable about the two men who kept coming back for fried chicken at the new KFC outlet in Bangalore. Nothing, that is, until they proved to be undercover agents for city officials, who charged that the chicken they had bought was adulterated, misbranded, unfit for consumption and laced with dangerously high levels of monosodium glutamate--a seasoning that authorities claimed could cause cancer when consumed in large amounts. (Studies conducted by the U.S. Food and Drug Administration have found no link between MSG and cancer.) Shaken KFC managers, who denied the charges and pointed out that the company serves the same chicken in 9,400 restaurants in 78 countries, were given until this week to prepare their case for why the store shouldn't be shut down permanently. Meanwhile, the franchise remained open and busy under 24-hour police protection, guarding against farm groups and Hindu nationalists who have vowed to drive foreign companies out of the country.

The pressure on KFC and its corporate parent PepsiCo was part of a growing anti-American furor that has made some multinational firms wary of the world's largest democracy (pop. 910 million). On the streets of New Delhi in recent weeks, Hindu nationalists have smashed cases of Pepsi-Cola and disfigured billboards for the soft drink, all the while chanting "Pepsi go home!" Not to be outdone, a socialist party has for more than a year held daily rallies outside Parliament against both Pepsi and Coca-Cola. Protesters have demonstrated inside as well: opposition lawmakers stormed out of Parliament last month to challenge a new agreement to share programming between the government-owned television network and cnn.

But the sharpest blow to multinationals came in the state of Maharashtra, where right-wing politicians on Aug. 3 canceled the largest overseas investment ever made in India-a $2.8 billion electric-power plant that Enron Corp. of Houston was building near Bombay. Enron, which broke ground in March and stands to lose $300 million if it abandons the venture, is seeking talks aimed at permitting work to resume. "This is typically Indian," says Barton Biggs, chairman of Morgan Stanley Asset Management, which runs an Indian mutual fund. "For every three steps forward, they take two steps back."

Is India retreating into its old xenophobia? In this century British rule bred proud anticolonial traditions that combined with go-it-alone socialist policies to turn India into a black hole for foreign investors. Just four years ago, however, the government of Prime Minister P.V. Narasimha Rao began to scrap decades-old barriers to foreign capital, including restrictions on ownership and the repatriation of profits. Suddenly financial gurus touted India as the next hot spot for investment. Also reformed have been laws that made it impossible for foreigners to own a majority of an Indian company and forced them to get licenses from a web of corrupt bureaucracies.

But Rao's free-market policy triggered an antiforeign backlash that could slow the flow of sorely needed money into the country. Overseas firms spent more than $1 billion to build new factories and facilities in India last year. While that was a big increase from $620 million the previous year, it remained meager compared with the $34 billion that China attracted in direct foreign investments in 1994.

With national elections scheduled for mid-1996, antiforeign agitation could spin out of control. Fishermen across the country threaten to block harbors in November to protest the opening of Indian waters to foreign fishing companies. Coca-Cola, which withdrew from India in 1978 after the government ordered it to reduce its equity in joint ventures to 40%, last year re-entered the Indian market with an ad campaign proclaiming we are back. Activists have since scrawled on Coke billboards, till we throw you out again. But Coca-Cola chairman Robert Goizueta is keeping a brave face. Says he: "There has been little reaction from the consumers. Our sales are very strong in India. We cannot afford to turn our back to it."

Enron ran afoul of nationalist zeal when the U.S. firm got caught between warring political factions. The company agreed to build a 2,015-MW gas-fired generating plant in 1992, when Rao's reformist Congress Party controlled the Maharashtra government. But after the party lost state elections last March, power passed to a coalition of the Bharatiya Janata Party (b.j.p.), the country's largest opposition group, and a Hindu right-wing party. They canceled the contract, declaring that Enron's rates would be too high and charging, without proof, that the company had made under-the-table payments to Congress.

But such setbacks have not kept several overseas companies from quietly thriving in India. Kellogg's cornflakes and other cereals became hits when the Michigan company began selling them in April. Middle-class shoppers found the breakfast foods tastier, more nutritious and better packaged than Indian cereals, which typically come in plastic bags. This kind of consumer success has shielded the company so far from criticism by die-hard opponents of foreign investments.

Technology companies from the U.S., Germany and other countries are also prospering in India. Attracted by a large pool of low-wage computer scientists, multinationals are designing software in Bangalore, which has become known as India's Silicon Valley. Revenues from Hewlett-Packard's Indian plants have more than doubled, from $36 million in 1993 to $75 million last year. Motorola has invested more than $30 million in India since 1991 and plans to increase that amount fivefold over the next three years.

Most antiforeign furor has been whipped up by political parties to exploit public qualms over Rao's reforms. Contends Digvijay Singh of the Socialist People's Party: "These multinationals are cheats. They use bribes as their main weapon, and their only aim is to loot our country." Responds Finance Minister Manmohan Singh: "If India bars consumer goods, other countries will bar imports from India. In the long run, it is bad politics."

The question is whether the economic reforms of the past four years have caused enough turmoil to stall the liberalization program. Loud protests have accompanied the opening of the airwaves to Rupert Murdoch's STAR TV, Viacom's MTV and Ted Turner's CNN, which have revolutionized the homelife of the middle class. Many Indians wonder whether they--and especially their tube-glued kids--are better off than they were before. Complains Shamsul Islam, a teacher of political science at Delhi University: "Now the youngsters dress, talk and eat like Americans."

U.S. fast-food chains have only begun to arrive in India, but nationalists already want them gone. "We will physically throw them out if they don't pack up and leave," vows M.D. Nanjundaswamy, the president of an influential farm group, who has targeted KFC and calls Western fast-food chains bad for health and the environment. Also on the nationalists' enemies list are McDonald's, Pizza Hut and the Wimpy hamburger chain-not to mention PepsiCo packaged foods, ranging from Chee-tos cheese snacks to Ruffles potato chips. The popular chips caused the B.J.P. last year to coin a slogan that encapsulates the party's ambivalent attitude toward capital from abroad: "Microchips Yes, Potato Chips No!"

Such attacks have found their mark. Parliament watchers predict that whichever party wins next year's elections will slow the entry of multinationals into the agricultural, consumer and fast-food sectors. Says Jay Dubashi, economic adviser to the B.J.P.: "We still fear that the foreigner will exploit, dominate and control us."

Or maybe in the front of Indian minds: last month movie houses began showing Oh Darling, This Is India, a black comedy in which a look-alike for the President of India offers the entire country to a group of foreign statesmen and executives. Not exactly a subtle image, but neither are the nationalist outbursts that threaten to stall India's effort to become an Asian tiger.

--Reported by Anita Pratap and Dick Thompson/ New Delhi and Sribala Subramanian/ New York

With reporting by ANITA PRATAP AND DICK THOMPSON/NEW DELHI AND SRIBALA SUBRAMANIAN/NEW YORK