Can India Woo Foreign Business? AFTER THE BHOPAL SETTLEMENT

THE recent legal settlement in the Bhopal tragedy could make India more inviting for foreign investors. If Prime Minister Rajiv Gandhi can weather the political storm over the agreement, observers say it will show that his government is able to confront concerns about corporate liability in an industrial accident.

Last week, the Indian Supreme Court ordered Union Carbide to pay $470 million in compensation to thousands of victims of the December 1984 gas leak at the Bhopal pesticide plant owned by the American multinational's Indian subsidiary. The action was agreed to by Union Carbide and the Indian government representing all Bhopal victims.

Government officials predict that it could take several months for the victims to begin receiving their money. More than four years after the accident, officials have yet to finish processing the more than 600,000 claims. Another problem is providing for those suffering from latent effects of the gas poisoning.

In setting compensation, the court averted a ruling on liability. Still, foreign diplomats and businessmen hope the judgment will prompt the government to set a ceiling on corporate liability.

``This could pave the way for dealing with the whole question of public liability, which has deterred investment in chemicals and petrochemicals,'' says a senior diplomat here.

The decision comes at a time of growing American business interest in India. The Reagan administration launched an effort to improve ties with India by boosting US trade and investment in the subcontinent. Diplomats say that strategy is slowing paying off. Last year, trade between India and the United States, its largest trading partner, jumped 30 percent to $5.5 billion.

American diplomats also expect that US investment, now about $600 million, will grow steadily in the coming years. American companies have been lured to take a new look at the protected Indian market by the economic liberalization that began under the late Prime Minister Indira Gandhi and has accelerated under her son, Rajiv.

Companies ranging from American Telephone & Telegraph Company to PepsiCo are planning projects in India. Even Coca-Cola Company, which pulled out in the mid-'70s in a bitter dispute with the Indian government, is bidding for a comeback to beat out rival Pepsi in the process.

Still, India's Byzantine bureaucracy, limits on equity holdings by foreign companies, piracy of patents and trademarks, and liability concerns remain major deterrents for American companies.

As a result, US investment here has been sluggish, falling far behind China, where American investment has topped $3 billion.

In the chemicals and petrochemicals sector, American diplomats and executives hope the Bhopal settlement will break the ice. Union Carbide itself plans to take three projects off the back burner and seek government approval, a spokesman said.

But the liability question causes worries. Chemical companies could face unlimited liability in an accident, observers say. A 1986 Supreme Court ruling related to a gas leak at a New Delhi fertilizer plant a year after Bhopal extends liability to the factory and surrounding area, and compensation is linked to injuries and the company's ability to pay.

The legal uncertainties scare companies such as E.I. du Pont de Nemours & Co., which in collaboration with an Indian firm, plans three chemical projects totaling $200 million. The new plants would not produce dangerous materials. Du Pont says it is holding off on riskier projects until legislation is passed placing a limit on liability.

``The situation today is virtually stopping any project of modest risk, because basically you are betting the company and no one is ready to do that,'' says Eugene Kreuzberger, president of the Indian operation.

Much, however, will depend on Mr. Gandhi's ability to contain the political fight threatening to erupt over the settlement. The first salvo has been fired, with opposition leaders charging that government officials were paid off to settle the case. Gandhi faces a tough struggle to win reelection in a national poll later this year.

The compensation is far below the $3 billion originally sought by the government, but close to the $500 million out-of-court settlement that the two sides reportedly almost reached in late 1987 - scuttled by outcry from victims, their lawyers, and politicians.

Also sensitive will be the distribution of funds to survivors of the accident. About 3,000 died and more than 200,000 are said to have debilitating injuries and illnesses from the accident.

The five-judge Supreme Court has ordered Union Carbide to pay the lump sum by March 23, although it has not spelled out how it reached the $470 million figure or how it will be dispersed.

The governments in New Delhi and Madhya Pradesh State, where Bhopal is situated, have faced widespread charges of corruption in handling special medical and rehabilitation aid for the Bhopal victims. To avoid problems, the central government is expected to establish a special office to handle the compensation.

``There have been so many failures on the part of the government in handling the case: documenting the victims, managing the litigation, and handling the medical and rehabilitation assistance,'' says Maya Daruwala, a lawyer who has written extensively on the case. ``This underscores the infirmities of the Indian government and legal system in dealing with this tragedy.''