India's cola revolt taps into old distrust

As the health minister for the Indian state of Karnataka, R. Ashok has picked a rather large fight. By banning the sale of all Coca-Cola and PepsiCo. products in his state's schools, colleges, and hospitals – claiming that the drinks contain unsafe levels of pesticides – he is shaking his fist at two of the biggest names in global capitalism.

To some, it might seem a controversial stand, especially since the federal government has since refuted the allegations. Yet here, in a country where megacorporations still have the scent of modern-day British East India Companies coming to extract the nation's wealth, the decision takes a populist flavor. In fact, one-quarter of India's 28 states have now limited sales of Coke and Pepsi drinks.

It sounds a note of caution for foreign firms seeking to make India their next great frontier. Though not enough to frighten off investors eager to reach India's 1.1 billion wallets, recent weeks are a reminder that beneath the growing appetite for Western goods there remains a suspicion of foreign companies.

"Multinational corporations provide an easy target," says Amulya Ganguli, a political analyst in New Delhi. "These companies are believed to be greedy, devoted solely to profit, and uncaring about the health of the consumers."

Such attitudes are on the decline with India's economy opening as never before and raised expectations here that the country will one day be considered a heavyweight – not a victim – of the global marketplace. Foreign investment has doubled to $6 billion in the past three years, and some forecasts have it more than doubling again by 2009. And imported goods have become status symbols for the middle class. Sales of Coke more than doubled from 1994 to 2003, though they have stagnated since.

Yet, despite the changes here, foreign firms can still quickly run afoul of public sentiment. Troubles began in 2003 for Coca-Cola and Pepsi with allegations of pesticides in the drinks. A watchdog group, the Centre for Science and Environment (CSE), rekindled those concerns last month with a report that found unsafe levels of pesticides in Coke and Pepsi. In response, Coca-Cola commissioned a study by a British laboratory that contradicted those findings. The Indian health ministry, too, said that the CSE report lacked "scientific and statistically valid basis," and that its results were "inconclusive."

As of yet, there are no estimates of how much business Coca-Cola and Pepsi have lost in the past month. But observers suggest that the scientific ping-pong is just a veneer for the underlying issue: A deeply-rooted distrust of big business – and particularly foreign big business – in India.

Coca-Cola has felt the pinch before, pulling out of the country in 1977 when the government demanded that it reveal its "secret" formula. IBM pulled up stakes the same year, when the government demanded that it give an Indian company some control over its local operations. In a more recent and oft-repeated episode, farmers destroyed a Bangalore Kentucky Fried Chicken in 1996 because they believed it hurt local business.

India's outlook toward foreign firms hit a nadir in 1984 when a Union Carbide plant in Bhopal leaked toxic gas into the city, immediately killing between 3,500 and 8,000 people.

Yet the distrust goes back generations, even centuries, cultural observers say. To many Indians, the activities of the British here were seen largely as looting – taking India's treasure with little regard for its people. After independence, Prime Minister Jawaharlal Nehru promoted a strongly socialist economic mentality, isolating India to protect it from the whims of outsiders.

"There is a generation that harks back to that [previous] experience, and it has profoundly influenced the thinking of bureaucrats and intellectuals," says Sumit Ganguly, an India expert at the University of Indiana in Bloomington. "They set the political discussion."

This strain is most obvious in the southern state of Kerala, which is run by a Communist government, as well as a chief minister who "still claims to be a revolutionary" tilting against the evils of capitalism, says Mr. Ganguli. It is so far the only state to ban all sales and production of Coca-Cola and Pepsi products. In addition, it has also declared its intention to be a "Microsoft-free" zone – using Microsoft's competitors in state schools to protest the company's virtual monopoly in the PC market.

Yet even in Karnataka, home of high-tech hub Bangalore, the ban on Coke and Pepsi in schools and hospitals resonates with a wary populace. For this reason, experts say, the cola revolt there and in six other states has more to do with politics than public health.

After all, the overreliance on pesticides in Indian agriculture means that "pesticides are present in everything – even breast milk," says Arvind Kumar, a researcher at the watchdog group Toxic Links here. Twenty percent of all food commodities exceed the maximum pesticide residue level, and 43 percent of milk exceeds the maximum residue levels of DDT, according to a 1999 report by the All-India Coordinated Research Program. But "if you target multinational corporations, you get more publicity," Mr. Kumar adds.

Karnataka health minister Mr. Ashok dismisses the claim: "The decision was taken purely on the basis of public health," he says, adding that Karnataka might also move to a blanket ban like the one in Kerala.

Even with such threats, however, multinational corporations aren't likely to stay away. Actions like these "will only slow down the pace of reform, they cannot kill it," says D.K. Joshi, principal economist at CRISIL, a credit-ratings company in Mumbai (formerly Bombay).

Still, recent weeks offer lessons on how to negotiate the prickly Indian market. Mr. Joshi suggests that companies should stay out of states hostile to big business. Others say companies will have to be better at outreach. "They have to look beyond the bottom line and cultivate an image of working for the benefit of the country," says Mr. Ganguly.

Indeed, the froth over fizzy drinks could benefit multinationals in the long run, some say. "In the new atmosphere of globalization, people are slowly realizing that there is no way out from depending on the private sector," says Ganguli.

• Saurabh Joshi contributed to this report.