Wednesday, 06 Jul 2011
India street scene
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 Smt Pratibha Devisingh Patil, (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.
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. For example, there continue to be reports of the use of child labour, particularly in the textile industry.
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$1.2trn economy (world’s 11th largest, 4th in PPP terms) supports 1.2bn people but average GDP per capita of US$1,032 masks extremes of inequality where some 70% of the population live on less than $2/day.
The economy has enjoyed strong growth for the last decade, growing on average at 8% pa, primarily driven by an increase in private investment (to some 36% of GDP), with rates of 7.4% in 2009-10 and 8.5% in 2010-11. Growth prospects remain strong with First Quarter results showing 7.8% growth over the same period last year underlining the broad strength in manufacturing and services.
However, inflation at 8.9% is a concern. The Central Bank has gradually raised interest rates - nine times in 15 months to stand at 7.25% - in an effort to cool inflationary pressures.The Government is predicting a fall to 6% based on this year’s regular monsoon/good crops and an associated easing of food price pressures.
The Indian government is also watching the widening of current account deficit, which has risen above 3% of GDP, and the sustainability of capital inflows. India has a trade deficit of near 10% (of GDP) and is especially sensitive to oil prices, with energy related imports 7.5% of GDP. Unlike other large manufacturing exporters, India relies on a combination of service exports, remittances from overseas workers and foreign capital to plug the trade gap and build its foreign exchange reserves cushion (currently US$300bn).
Business woman on the phone
Despite concerns that record international portfolio flows may at some stage reverse and are putting upward pressure on the Rupee, the government has so far rejected the need to impose capital controls or intervene in the currency markets. More strategically the government is seeking to expand India’s low share of global markets (1.3%) by diversifying export markets in Asia through regional Free Trade Agreements (e.g. Singapore, ASEAN, South Korea). The ongoing FTA negotiation with the EU is another key target.
Although the domestic outlook is bright, the downturn reinforced long-standing caution on opening the economy, especially in the financial sector. Many observers hoped liberalisation would proceed more quickly after the Government’s re-election in 2009 but there has been little progress, notwithstanding some recent positive hints of movement on the previously off-limits retail sector. India also needs to make itself more attractive to foreign investment (currently 134 out of 183 in the World Bank’s Ease of Doing Business rankings).
Looking ahead, in the medium term India expects to sustain high growth but faces key challenges; to maximise its “demographic dividend” (half the population is under 25 years, growing fastest in the poorest states); creating jobs and developing a more labour-intensive manufacturing sector to employ this workforce; generating public and private investments in infrastructure, and improving the delivery of public services, including education and health.
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.
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.