Business in India - Opportunities and Political Risks - Case Study Example

Business in India –Opportunities and Political Risks The growth trajectory in India for the past decade has been impressive averaging 6.9% growth rate (World Bank). This has attracted multiple international firms who are encouraged by the presence of a high skilled manpower and a growing and influential middle class. Most of these firms have sought to look at the country’s diversity as an advantage. The prominence of India as a centre for international businesses is confirmed by the growth rate of foreign firms, this growth is marked at 7% annually. Whereas this points at a highly receptive market, it is critical to note that the resources in India would accommodate a higher number of international businesses. In any case, they remain greatly underutilized considering that we are looking at one of the world’s most populous country. The current growth and the existent resources are vital signs of a market with a possibility of exponential growth (Kapila & Kapila, 2006.p.67). However, there exist certain factors which have greatly undermined realization of such potential. These factors undermine the attractiveness of the Indian market. Just like in any business scenario, the influence of external factors epitomized by social, economic, cultural, environmental and political factors play a large role in determining the attractiveness of a market. However, with the advancements in technology and given the lucrative nature of some businesses investors have found ways and means of minimizing exposure to risks arising from some of these factors mainly; social, environmental, cultural and economic factors. Irrespective of these advancements, it has proved impossible to manage all risks. In any case, academicians and business researchers have come to agree that some risks cannot be managed from a business perspective, especially political risks (Heide, 2008.p.20).Political risks are more or less intensive existing in every country, they are represented by the political elite, political systems and resultant policies. These are impossible to alter, unless those within the set up initiate the changes. Most attractive economic markets are backed by a stable political system, this is essential as it gives the market some level of certainty. This study zeroes on the Indian market. The choice of the market is informed by the level of international business in the country as well as the great potential the Indian market holds. However, realization of this potential is curtailed by certain factors with the most prominent of these being the political factors. This has resulted to political risks which most international businesses have tended to shy away from. The study undertakes to look at the challenges arising from the Indian political environment in an attempt to understand the exact political risks that characterize this market. Business opportunities India is still a developing economy, and thus it represents opportunities in all sectors of the economy. Perhaps even more importantly, the economy is in transition, from a closed economy to a more open economy which is slowly but surely embracing international business (Singer & Cohn, 2007.p.40). The attractiveness of the Indian market is not only on the transitionally nature but on the Indian middle class as well. The Indian middle class population is approximated at around 150 to 300 million (Chandra, Rau & Ryans, 2002.p.71). This has acted as a beacon to many multinational investors who are interested in capturing a slice of this huge and growing segment. Irrespective of the political challenges that maybe highlighted in this study, it is quite obvious that the market transition typified by a growing domestic market, a large pool of scientific and technical pool, a strong and growing information technology sector, and a high level of entrepreneurial energy represent a great opportunity for international businesses to succeed (Nobrega & Sinha, 2008.p.6). Besides this, the ongoing reforms are continually creating and investor-friendly environment by rationalizing foreign investment approval and liberalizing regulations. Most executives already operating in India look at the emerging market as a critical one and one that represents great long-term potential. However, their opinion of the market status in the near term are tempered by the challenges of doing business in an economy that is yet to fully accommodate liberal trading approaches (Fernandes, 2006.p.4). All the same, most of these investors are willing to stake it out until the market becomes open and the going gets easier. The general feeling is that anyone thinking of investing in India must do so with a long-term plan and must be prepared to persevere as the market learns to be more accommodative. The most important thing is that opportunities remain rife and there is certainty in long-run success. India’s political status India is a federal republic made up of 28 states and 7 union territories. It runs a common law legal system which also accommodates separate law codes mainly Muslim, Hindu and Christian. Foreign Direct Investment is still highly regulated with the sternest sector being the retail sector. This sector has traditionally been burdened with strict licensing procedures leading to a diversified set of political barriers. Until recently, the Indian government has been known for protectionism policies enforced by high tariffs which have sought to safeguard home grown businesses (Slamanig 3). This has had a negative impact on FDI a factor which has limited growth of international business in the country over the years. Current political state At the moment, the government is led by a rather loose coalition of parties, National Democratic Alliance. This has failed to establish a clear economic direction for the country. The main reason for this is internal disagreement on many key economic matters. Just like is the case with the U.S. Congress, most major decisions are based on tradeoffs and compromises (Chandra, Rau & Ryans, 2002.p.21). The most visible act of the Indian government in the business sector is continued privatization of the major sectors of the economy. However, these efforts have slowed down and pundits have argued that it is a case of making two steps forward and one step backward. In essence, privatization is associated with mass layoffs as most government run businesses tend to be bloated with excess labor (Hoveyda, 2010.p.81). A case of privatization effects can be understood by looking at privatization in Central European countries where it translated to massive layoffs but ensured efficiency. In India, the concern is largely on the scale of job losses and little focus is on the advantages accruing from these undertakings. Going forward, the main question is whether the government can withstand pressures to slow down or further postpone privatization. This should be a concern for every business and the government’s stance needs to be watched carefully (Chandra, Rau & Ryans, 2002.p.22). The Gandhi and Nehru governments, which took over from the British reigns largely favored socialist ideas. These ideas have tended to inform the Indians preference for public enterprises. This is irrespective of the fact that a majority recognize the value of having a viable private sector that includes global multi-national companies. It is also important to recognize the influence of large family enterprises that have for long dominated the private sector. Historically, these entities have exploited positions of strength and have often benefited from tariffs, quotas and outright bans of foreign products and investors (Kesselman, Krieger & Joseph, 2010.p.285). It is imperative for anyone considering investing in India to intently look at the ensuing political situations and investment climate before deciding to set up. Generally, the trend seems to be toward privatization and support for foreign direct investment. But the continuous wrangling of the parties making up the coalition government and other problems such as corruption has undermined the government’s position to take strong economic positions. Current political situation in reference to international business At the moment, India is grappling with a slowing economic growth this is represented by a 5.3℅ growth as compared to a 9.2℅ growth in a similar period last year. The slowed growth has been attributed to the ongoing global financial turbulence but Indian investors have come out to blame lack of purposeful political leadership. The feelings among most of the investors are that the current government headed by Manhoman Singh has failed to initiate significant reforms in the eight years of leadership that can allow proper conduct of business. Irrespective of the slow approach to reforms, the Singh government has made it to create a favorable economic environment for international businesses by scrapping permits and quotas. Singh has also shown signs of speeding up critical policies that would open up India’s retail sector to global retail giants such as Wal-Mart. These signs have been perceived by most international businesses as evidenced by the current announcement by IKEA, the world’s largest furniture maker, who recently announced a 1.5 billion Euro investment in India. Such announcement has masked the slow reform path in different sectors but has illuminated the underlying India growth. There is continuous pressure for the government to act, in respect to instituting market reforms, unfortunately the necessary steps are greatly frustrated by stiff political opposition to change. However, there is general agreement that these changes must take place sooner or later given the government’s intent to attract foreign capital and revive investor confidence. As already mentioned, India is led by a coalition type of government where most decisions even those affecting the economic environment are made on a bargain basis. Such disintegration characterizes the entire political system down to the regional levels. This makes it hard for every major investor, mainly multi-national companies; these have to negotiate with the political masterminds. The political masterminds purport to represent the interest of their different constituencies. This has emerged as a major stumbling block, the caste-based politics; present a major challenge for international businesses (Shah, 2004.p.14). A perfect example is the planned Wal-Mart entry into the Indian market, even after extensive agreements with the Indian major Bharti regional political groupings continue to frustrate set up as they come up with valid demands. A similar case was evident with the Tata Nano, Singur plant, even after extensive agreements with the central government the plant construction never took off. This was due to a series of demonstrations initiated by different political groupings that pretended to support the displaced people. The real intention was to have Tata yield to their regional demands. Other historical stumbling blocks of a similar nature are represented by the 1977 exit of major international businesses, Coca Cola and IBM, these exited following the government’s insistence that they first enlist in the country’s stock exchange. The blight of Indian politics is the association between the state and central governments. As a number of states are governed by parties different from those forming the central government, they yield enough power to hold the central government hostage to their demands. There are many instances where these parties have initiated country wide strikes, or bandh, majorly in instances where they oppose the collective position of the government on certain issues in which they have an interest (Budhar, 2011.p.58). This type of political contests has adversely affected business and has had a toll on the country’s economic development. This is largely due to the level of uncertainty that has come to characterize the Indian political environment. International businesses prefer a somewhat certain environment, they do not want to close down operations as every time people taking to the streets. They prefer a sober investment climate exemplified by cohesive political parties or at least parties who engage ideologically not through widespread demonstrations. The political structures are not the only risk to international business in India. The country also faces significant challenges due to widespread corruption, bureaucratic pressures, and fragile political relationships with neighboring countries. India’s Bureaucracy There is nothing that puts India’s bureaucracy in perspective as the “Bureaucratic report” released by the Political and Economic Risk Consultancy group bases in Hong Kong. The report dubbed India’s bureaucracy as the “the most stifling in the world”. India had a rating of 9.21 in a scale of 1-10, where 10 represent the most bureaucratic (Boghani, 2012). The report linked the low rating to such factors as corruption and inadequate infrastructure. The report described a scenario where officials frequently demand for under the table payments and business executives are willing to make the payments to overcome the bureaucratic inertia and receive certain favors. The report expressed a bureaucratic system as one where public employees perceive themselves as officials in a hierarchical structure, the higher you are within the structure the greater responsibilities you yield and thence the more important you are. Burdensome and inconsistent tax, business regulations that make business in India both expensive and frustrating, and a slow justice system largely exemplify the bureaucratic structure. In an attempt to circumvent through this complex environment, business persons are torn between paying bribes and seeking opportunities elsewhere. At the end of the day, and irrespective of the choice business people make investment remains and expensive venture, more so because of the inefficiency (Budhar, 2011.p.58). Perhaps the most telling fact is that these bureaucrats are never held accountable for wrong decisions. This is owing to their political connections which guarantee them immunity. These individuals wield “terrific powers” a fact that makes it impossible to contend with them in courts. The courts are largely seen as a puppet for these individuals. These findings explained the reason behind the negative perceptions held by most average Indians and potential investors. It would be impossible for small investors to contend with big investors who are favored by the bureaucratic structure this is mainly because they are in a position to give bribes. Besides the Political and Economic Risk Consultancy’s report, there have been other reports surveying Indian bureaucracy. A vast of these reports found a large number of civil servants complaining of political interference (Hardgrave & Kochanek, 2008.p.22). These employees also operated in great fear as anyone who tended to question the undue influence/interference would be transferred or face demotions. These reports are just a part of many other reports that detail the extent and acceptance of bureaucracy in India. For most international businesses, there is always an interest in an efficient system. This is because an efficient system guarantees a somewhat level play field for all businesses. Otherwise, most businesses with a good reputation would be opposed to setting up in India as they would be unwilling to participate in the under table payments which are widespread (Budhar, 2011.p.58). Bureaucracy in India has also ensured that certain businesses maintain a stronghold on certain sectors which disadvantages new entrants. Even though this may seem more of an economic risk, the link with the political class and the apparent political interference establishes it as a major political risk. Corruption Closely linked to bureaucracy is corruption. In most cases, business person’s intent in setting up business in India and encounter the bureaucratic system often prefer to make under table payments to “clear the way” and receive favors. This explains India’s low ranking in the corruption index as generated by Transparency International; the country has a rating of 3.1, where 1 represents the most corrupt (ET Bureau). The most common form of corruption is workers request of baksheesh for work done-or a payment to get something done. In most cases, payment or refusal to pay this kind of “tip” is the difference (Bose, 2009.p.246). Though corruption seems a widespread issue, some sectors are particularly affected such as construction, engineering or mining. It is also common when a business needs something from the government, such as a license, tax refunds or various types of permits. For international businesses, the greatest risk comes when contending with local businesses or individuals who have great connections with the political elite. This stifles a business’s chances as these are almost certain of receiving favors over the new entrant (Goold, 2012.p.31). According to Bose, most foreign companies will tend to stick to their rules and ethical standings as well as the existent laws banning corruption such as the prohibition of corrupt practices Act. More so, international businesses prefer to achieve their objective in a straightforward manner. However, their Indian counterparts “take care of it, and turn a blind eye.” This creates an uneven playfield for new businesses, especially international businesses (Bose, 2009.p. 246). Political unrest Although India is a largely peaceful country, there has always been concern in the Northern region where India is constantly involved in wrangles with Pakistan over the Kashmir region. Kashmir has been a flashpoint between India and Pakistan for more than 50 years (CNN). At the moment, the region is divided into two where one part is controlled by India and the other by Pakistan. The India controlled Kashmir includes three regions, Kashmir Valley, Jammu and Ladakh. The tension between the two countries is on the actual border. India claims the entire region is part of its territory whereas Pakistan lays claim to the region. Historically, there have been fights over the region, the first of these was in 1947-48 which was stopped through a ceasefire initiated by the UN and the most recent was in 2010. In 2010, there were widespread violent protests which resulted to the worst bloodshed involving India in the past decade (BBC). Going forward, the situation may escalate or there maybe an amicable solution to the conflict. All the same, the situation represents a significant political risk especially in reference to the three regions under India’s control. Conclusion Judging from the economic growth India has registered over the past years, it is easy to tell that the economy is opening up to the rest of the world. There is now a greater FDI flow a factor which has helped in bolstering the economy. International businesses still face significant challenges, mainly because the transitionally nature of the economy, from a closed to an open economy, has come with a host of problems. The most recognizable is a system which has still to adapt to a shifting market and still sticks with its bureaucratic structures. This has made it difficult for new entrants who want to invest in an efficient system. The caste-political system which is part of this bureaucratic structure has created so many hindrances to business negotiations. Further, this has frustrated many international businesses that want to carry out negotiations with only defined parties and not the highly disintegrated political groupings which advance individual interests. Additionally, corruption has also affected the speed at which international businesses set up as these are intent in carrying out business in an honest way. However, these challenges are largely offset by the great potential the market has, as represented by the large and growing middle class which provide a ready market and a pool of qualified personnel. Also, the government has in the past years carried out reforms to accommodate international businesses by leveling the play ground mainly by opening up the economy. Bibliography BBC. (2010). The future of Kashmir. Retrieved December 3, 2012, from BBC: http://news.bbc.co.uk/2/shared/spl/hi/south_asia/03/kashmir_future/html/ BOSE, R. K. (2009). India: business checklists : an essential guide to doing business. Singapore, John Wiley & Sons (Asia). Budhwar, P. S. (2011). Doing Business in India: Building Research-based Practice. New York, Taylor & Francis. Boghani, P. (2012, January 26). Red tape chokes India’s economic rise . Retrieved December 3, 2012, from CNN: http://business.blogs.cnn.com/2012/01/16/red-tape-chokes-indias-economic-rise/ Chandra, A., Rau, P. A., & Ryans, J. K. (2002). India business finding opportunities in this big emerging market. Ithaca, N.Y., PMP Dahiya, R., & Behuria, A. K. (2012). Indias neighborhood challenges in the next two decades. London, Pentagon Security International . ET Bureau (2011, December 2). Transparency International corruption index: India drops to 95th position. Retrieved December 3, 2012, from The Economic Times: http://articles.economictimes.indiatimes.com/2011-12-02/news/30467987_1_corrupt-country-australia-shares-cases Fernandes, L. (2006). Indias new middle class: democratic politics in an era of economic reform. Minneapolis, University of Minnesota Press. Goold, D. (2010). Doing businesss in India:Success Failure and the Prospects for Canada. Foreign Poilicy for Canadas Tomorrow No.10 , 1-52. Hardgrave, R. L., & Kochanek, S. A. (2008). India: government and politics in a developing nation. Boston, MA, Thomson/Wadsworth HEIDE, M. (2008). Opportunities and Risks in India and China. München, GRIN Verlag Hoveyda, A. (2010). Indian Government And Politics. New Delhi: Pearson Education India. Kashmir, M. B. (2010, September 25). India and Pakistans bitter dispute-September 25, 2010. Retrieved December 3, 2012, from CNN: http://articles.cnn.com/2010-09-25/world/india.kashmir.explainer_1_pakistani-backed-forces-kashmir-conflict-india-and-pakistan?_s=PM:WORLD Kapila, R., & Kapila, U. (2006). Indias economy: a journey in time and space. New Delhi, Academic Foundation. Kesselman, M., Krieger, J., & Joseph, W. A. (2010). Introduction to comparative politics: political challenges and changing agendas. Boston, Wadsworth. Morris, C. (2010, June 3). Indias bureaucracy is the most stifling in the world-. Retrieved December 3, 2012, from BBC: http://www.bbc.co.uk/news/10227680 Nobrega, W., & Sinha, A. (2008). Riding the Indian tiger understanding India--the worlds fastest growing market. Hoboken, N.J., J. Wiley & Sons. REUTERS. (2012, July 2). Key political risks to watch in India. Retrieved December 3, 2012, from REUTERS: http://in.reuters.com/article/2012/07/02/india-risks-idINDEE86107V20120702 Shah, G. (2004). Caste and democratic politics in India. London, Anthem Press. Singer, M. B., & Cohn, B. S. (2007). Structure and change in Indian society. New Brunswick, N.J., AldineTransaction. Slamanig, M. (2012). Carrefour Enters India: Current Issues in International Business. München, GRIN Verlag. Times of india. (2012, January 12). Indian bureaucrats have terrific powers, rated worst in Asia. Retrieved December 3, 2012, from The Times of India: The TIMES OF http://articles.timesofindia.indiatimes.com/2012-01-11/india/30615745_1_malaysia-indian-bureaucrats-global-competitiveness-report The World Bank. (2012). GDP growth (annual %) . Retrieved December 3, 2012, from World Bank: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG Read More