Wednesday, 24 Oct 2012
Overseas Business Risk — India
Political and Economic
The Indian Constitution provides a system of parliamentary and cabinet government both at the centre and in the states. The Indian Parliament consists of the President, currently President Pranab Mukherjee, (elected for a five-year term as the constitutional head of the executive) and two Houses: The Lower House - Lok Sabha ('House of the People') - directly elected on the basis of universal adult suffrage; and the Upper House - Rajya Sabha ('Council of States') - indirectly elected by the members of state legislative assemblies.
The Congress Party and the Bharatiya Janata Party (BJP) are the two main forces in the current Indian political scene. Neither enjoys a clear Parliamentary majority. But, following their good performance in the May 2009 general election, the Congress is now in a dominant position and heads the ruling coalition at the Centre, called the United Progressive Alliance (UPA). The BJP leads the Opposition alliance known as the National Democratic Alliance (NDA)
India has a troubled relationship with its neighbour Pakistan, leading to at least three wars since the two countries achieved Independence in 1947. Since 2004, India and Pakistan have had several rounds of negotiations and set up a ‘Composite Dialogue’ aimed at settling all bilateral issues, including Kashmir. The Composite Dialogue remains suspended following the terrorist attacks in Mumbai in November 2008. Bilateral talks resumed in February 2010 but have made little progress yet.
India also has a complex relationship with China, with whom it shares a long, contested border. The two countries fought a short war in 1964 and have been unable to settle their respective territorial claims since then.
More information on political risk, including political demonstrations, is available in where you will also find details of LOCATE, the FCO's on-line registration service should you want the nearest High Commission to keep you informed of a crisis or similar emergency.
India’s US$1.8trn economy (world’s 11th largest, 3rd in PPP terms) supports 1.2bn people but average GDP per capita of US$1400 masks extremes of inequality where nearly 70% of the population live on less than $2/day.
The economy enjoyed strong growth in the latter half of the last decade averaging over 8.5% pa driven by an increase in investment and sustained consumption. However growth has decelerated to 6.5% in 2011-12 owing to an industrial slowdown and sluggish investment on the back of domestic policy uncertainty.
Inflation persisted at a high 9% in 2011-12, which prompted an increase in rates by 150bp over the course of the year. The RBI has since cut rates by 50bp in April 2012 with growth slowing and some moderation in inflation. Meanwhile the RBI cut the cash reserve ratio by 125bp in Q1 2012 on the back of tight liquidity conditions. However commercial banks have cut rates only by a meager 25bp, insufficient to spur growth. Although inflation has come off to 7% levels; inflationary pressures remain from high food prices aggravated by poor monsoon rains , impending hikes in administered fuel prices and imported inflation stemming from rupee depreciation. This will limit the scope for sustained rate cuts by RBI.
External sector indicators have also deteriorated with the current account deficit touching an all time high of 4.3% of GDP. Capital flows were relatively robust but insufficient to fund the burgeoning current account deficit which resulted in a reserve draw down of US$12.8bn. This prompted rupee depreciation of over 20% over the past year with the rupee trading at around INR 55/USD currently. The current deficit is higher than in the midst of a full blown balance of payments crisis in 1991 and the drawdown of reserves is raising vulnerability concerns. However reserves are still high at about US$288bn and despite the import cover falling to a decadal low of 7 months , it is still far high than 3 months in 1991.
With significant rupee depreciation, the government has moved to increase limits on foreign holdings of government and corporate bonds. Norms for external commercial borrowing and foreign investment in infrastructure bonds have also been eased. However there has been little or no progress in important liberalization measures such as the bill increasing limits on foreign direct investment , banking and pension reform. The challenges of a coalition government are also acting as a hindrance to the implementation of FDI in multi- brand retail sector, although 100% FDI in single brand retail is now allowed.
The government is also facing flak on the fiscal front, with a lack luster budget for 2012-13 announced by the then Finance minister Pranab Mukherjee and a high fiscal deficit of 5.9% of GDP and rising subsidies. A retrospective tax amendment for assets based in India on cross border transactions, squashing a supreme court ruling and the announcement of General Anti Avoidance Rules (GAAR) did little to help faltering investor sentiment . PM Manmohan Singh has now taken on the finance portfolio albeit temporarily, after Pranab Mukherjee stood down to become President. Singh has laid out a series of reforms he intends to take over the coming months: clarity and predictability on tax, controlling the growing fiscal deficit, unlocking more productive use of Indians’ savings, approving new foreign investment proposals, and unblocking big infrastructure projects and this has raised hopes across the board. The people running India’s economy understand perfectly well what ails it and what needs to be done to cure it the problem for them is the politics of getting these measures implemented.
Looking ahead, India will have to create a stable policy environment to sustain growth, maximise its “demographic dividend” (half the population is under 25 years, growing fastest in the poorest states); create jobs and develop more labour-intensive manufacturing sector to employ this workforce; generate public and private investments in infrastructure, and improve the delivery of public services, including education and health. India also needs to make itself more attractive to foreign investment (currently 132 out of 183 in the World Bank’s Ease of Doing Business rankings).
India has a robust parliamentary tradition, an independent judiciary, professional and apolitical armed forces, a vibrant civil society, and free and outspoken media. India has signed and ratified all of the major International Treaties and Covenants on Human Rights except the Convention Against Torture, which it signed in 1997. There has been progress on human rights in a number of areas, including on women’s rights and an important recent development for child rights has been the adoption of the 2009 Right to Education Act guaranteeing free, compulsory and quality education for children aged 6-14 years which came into effect on 1 April 2010. But implementation of legislation varies from state to state and awareness of human rights issues is inconsistent There continues to be reports of the use of child labour, particularly in the textile industry.
Land acquisition by companies and state governments for mining and infrastructure projects has been a contentious issue in several states, sparking frequent protests by indigenous groups and civil society actors.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Corruption is well entrenched in India and pervades many aspects of daily life. Corruption is often cited as a barrier to the effective development of the private sector and poses business risks that require pro-active management in the form of regular due diligence exercises and up-to-date risk strategies. Procurement practices often lack transparency and are usually coupled with a significant bureaucratic burden. These risks require careful management.
Politicians, bureaucrats and law enforcement officials often wield significant discretionary power and notable abuses have been brought to light. Several high-profile prosecutions in recent years have helped highlight that the legal framework for fighting corruption exists although enforcement is often weak and responses vary from State to State.
Dr Manmohan Singh, the Indian Prime Minister, has targeted corruption as a barrier to India’s efforts to 'march ahead as a nation' and the Indian Government regularly blacklists companies known to offer bribes from bidding for defence contracts.
In 2010, India was ranked 87 of 178 countries in Transparency International’s Corruption Perceptions Index.
A KPMG survey Bribery and Corruption: Impact on Economy and Business Environment - a series of high-level corruption scandals covered in media over the past two years prompted KPMG Forensic in India to roll out a survey questionnaire to leading corporates to get their insights on the subject of bribery and corruption. The survey, in January 2011, produced a quick analysis of the responses. The report was released in March 2011 at a press conference, by Dr. Surjit Bhalla, Economist and Chairman Oxus Research and Investments, Anupama Jha, Executive Director, Transparency International India, Deepankar Sanwalka and Rohit Mahajan.
The threat posed by numerous domestic and international terrorist groups in India is substantial. Coordinated terrorist attacks in locations frequented by foreigners and expatriates in Mumbai in November 2008 highlighted the increasing risk of collateral damage in India. Attack locations across major cities in India have included hotels, railway systems, hospitals, markets, cinemas, restaurants, mosques and other open public areas. It is likely that future attacks could target Western iconic locations and those places frequented by foreigners and expatriates.
There are a number of terrorist groups active and operational in India, with a substantial threat posed by Islamist extremist groups such as Lashkar-e-Tayyiba (LeT) and Jaish-e-Mohammed (JeM) whose aims have spread beyond the secession of Indian-controlled Kashmir to the establishment of a Caliphate in South Asia. Radical left-wing and Maoist groups such as the Naxalites originating in West Bengal also threaten the operation of business in India. These loosely united groups are engaged in what is described as the Naxalite-Maoist insurgency across numerous states of south, east and south-east India, and involving anywhere up to 20,000 individuals. Attacks have targeted India and Western commercial interests, and have disrupted business operations in affected regions.
Protective Security Advice
It is worth noting that India follows a patent registration system that gives priority to the first inventor to file an application. It is therefore crucial that applicants for patents in India file as early as possible irrespective of when they plan to begin using the product in India. The rights’ holder should therefore seek appropriate legal advice before launching in India.
Copyright abuse and piracy is widespread and IPR enforcement is weak. It is therefore important that the rights’ holder should develop a robust IPR strategy before entering the Indian market.
IP exists in five main forms: patents, trade marks, designs, copyright and geographical indications. Each provides different ways with which to guard your property.
Patents protect the processes that make things work.
Trade marks protect logos that distinguish goods and services.
Designs protect the look of three-dimensional shapes.
Copyright protects material only when it is written down or recorded.
Geographical indications protect the identity of a product as originating from a particular territory.”
“Internet piracy of films, music, books and software is particularly severe in India. Certain anti-circumvention measures have been introduced by amendment to the Copyright Act in 2012, but their effectiveness is yet to be seen.”
A number of British companies have been attracted by potentially lucrative business offers in India but there have been examples of fraud carried out using private data subsequently shared between the British and Indian companies. There have also been some specific examples of rogue Call Centres in India inappropriately using financial data acquired legitimately from their UK business partner. We therefore always recommend you research the market as best you can to understand any differences to the business environment in the UK and conduct basic due diligence before making any financial commitments (eg. checking that your Indian counterpart is a properly registered business and has a good reputation).
When considering doing business with Indian firms unfamiliar to you, it is worth bearing in mind the following:
An offer 'too good to be true' may, in fact, be just that.
Verify the data of your business partner, make appropriate due diligence checks.
Increase your vigilance when using e-commerce.
When making purchases, use secure payment instruments. When selling, secure the payment before delivery of the products.
Read the information provided on our Organised crime page.
More information is available on overseas business risk in a range of markets.