Risks of Doing Business in India

“Sell cleverness and buy bewilderment”- Jalaladdin Rumi

The quote gives apt advise to foreign companies investing in India. Indian business environment is different from the western world; hence, the risks are dissimilar. Price Waterhouse Coopers (PwC) with Economist Intelligence Unit (EIU) recently released a report on the same. I hold a different viewpoint on the risks. In this post, I am briefly describing the risks mentioned in the report with my detailed opinion.

 The report titled “Building a presence in today’s growth markets- The experience of privately held companies” discusses the US companies views on business risks in emerging and fast growing markets (EFGMs) with insights shared by the local PwC partners. The statement that got my attention – 

 “Brazil, China, and Russia also pose less risk to foreign companies than they did eight years ago. (India’s risk rating hasn’t changed.) All three countries have more resilient governments and economies and more-developed financial markets than they did in 2002 ”.

 I completely disagree with this statement in respect to India’s risk levels. India’s government was steady in the last decade. Secondly, economic conditions have improved and financial markets are more developed. Further in the report, India country snapshot states-

“India’s economy, powered mostly by domestic demand, has grown rapidly in the last decade and will continue to do so through 2015. The country’s political system is stable and its legal system is relatively impartial, though slow. Nevertheless, businesses face problems with corruption, red tape, and poor transport infrastructure. Government authorization is required to lay off workers in many cases, and no reforms perceived as weakening worker rights are likely to gain traction. Property disputes are common, as are unclear rules and obstructive bureaucrats.”

 This summarization is more accurate though the report doesn’t give any detailed viewpoints of the respondents. The report gives a chart of business risk ratings with ten risk groupings.

India Risk Analysis as per PwC EIU report

As you can see from the table, macro country level risks are covered. Multinationals enter the Indian market from growth perspective. The aim is to capture the market. Hence, the question is what are the challenges of doing business in India? Read further for my analysis of five major risks in areas where my views significantly differ from the report.

 1.       Consumer Market Risks

The one risk not covered in most multinationals’ business strategy is “Consumer Market Risks”. Indian market and customer demands are different from US and other developed country markets. For example, US is a large country with standardized city plans, infrastructure and uniform customer requirements. The American public wears, eats and drinks the same thing across the country. The taste differences vary but not significantly.

In India, customer requirements change by each state and within the state. The staple food of North Indians is wheat, and of South Indians is rice. Due to differences in religion, culture, language, weather and infrastructure, customer demands changes nearly every 100 kilometer. Hence, though on the surface the market size is huge for the country, the products have to be localized according to customer tastes. This means, multinationals have to enter a number of niche markets and may not enjoy the large economies of scale for selling a single product across the country.

Therefore, the 10,000 feet view to formulate business strategy does not work without understanding of ground level realities of local community. This is one of the key reasons for failure of multinational business strategies. It takes global senior management a couple of years to understand the issues and localize the business strategy.

2.      Employee Risks

The second premise for entering Indian market is to use the workforce at a lower cost. India has a huge young population. Multinationals entering India assume that India has a large workforce. However, most of Indian population resides in rural areas and illiteracy rates are still high in India. Secondly, a high percentage of people even in urban areas are self-employed. Moreover, with increase in urban middle class incomes, the percentage of working women have decreased. Hence, the employable English-speaking workforce is less than quarter of the urban population.

The next aspect is that India’s traditional culture is subservient to elders and seniors. The power distance index is high which makes an Indian employee far more compliant than a western employee. The downside is that if the organization has bureaucratic culture, the employees will follow orders blindly. Secondly, they will not disclose ground realities to senior management in straightforward conversation. Hence, there is a high likelihood of risks remaining hidden until crises time.

The critical point is that in India roughly 25% of resumes submitted are either fake or inaccurate in some aspects. This indicates that workforce is willing to resort to unethical practices to get and retain employment. It again reduces the possibility of transparent communication with management.

Lastly, the labor laws are strict for the manufacturing sector blue-collar employees but those aspects are not relevant for the service sector white-collar employees.

On an overall basis, Indian employees require a higher level of monitoring and management time. Senior management to counter these risks must invest in business intelligence tools to get accurate data and not base their decisions on perceptions, especially when they are taking global reporting. In India, senior managers need to remember, “Trust is not equal to control.”

 3.      Social Environment Risks

Historically Indian population is divided on basis of caste and religion. The same bias persist in majority of the population and any situation can become a security risks. Riots and terrorist activities mostly occur in the name of religion. This increases the physical security risks of an organization.

Unfortunately, sometimes organizational politics also runs on caste and religion basis. For example, the North Indians are pitched against South Indians. This changes the organizational dynamics and can cause difficulties in developing a cohesive team.

The second aspect is – India is a traditionally male dominated society with women holding an inferior position. Even in educated class sex discrimination occurs. There are high number of female infantile deaths, dowry cases and deaths, domestic violence and rape. India is the 4th unsafe place in the world for women. The negative perceptions on women are carried to the workplace. Organizations are challenged to maintain diversity and equality.

Economic growth has added new complexities in Indian social environment. Indian Gen X and Boomers generation grew up with very few facilities; as in those days nearly 90% of Indian population was below poverty line. However, Gen Y has grown up with regular infrastructure and communication facilities available in most urban households. With the urbanization and economic growth, western culture has significantly influenced Gen Y. Hence, there is conflict between value system of older generations and Gen Y.

Secondly, as more people have moved from low-income groups to middle-income groups, there is conflict between people with old money and new money backgrounds. In some situations, it turns into a class war with new money group seeking their pound of flesh. These aspects add further complexity to organization dynamics.

Last but not the least, corruption mindset prevails at all levels of the society. Indian public psychology rationalizes earning money through unethical means. Hence, resorting to receiving kickbacks, frauds, blackmail etc. is considered a smart move. Therefore, organizations have a high risk of white-collar crime and reputation damage.

All these factors coming into play within an organization can cause a combustible  scenario. Multinationals need to focus on building an organization culture and invest significantly in people management training.

4.      Legal/ Regulatory Risks

Indian law enforcement is weak.  Corruption has seeped into police and judiciary departments due to which justice is denied and delayed. The financial cost and time spent of legal cases is high as frequently they continue for 20 years or so. Hence, the public attitude towards legal compliance is lax. The attitude is that all illegal activities are fine until we are caught.

However, big cases attract huge media attention. Sometimes high profile personalities are used as sacrificial goats by law enforcement agencies to demonstrate their commitment. For example, Ramalinga Raju of Satyam fraud case is continuing and he was last week again denied bail. As per law, he committed a financial crime, which allows bail after investigation is complete.

The second aspect is quite a few laws are redundant and/or non-existent. The revision of laws takes a few years. For example, Indian Corporate Law revised bill has been pending for a couple of years awaiting parliament approval. Hence, the same defense from an international perspective sometimes cannot be applied in India

Presently, it is a risky proposition to break rules in India. With the latest high profile names involved in scams the Indian public wants the government to go after big names. The companies whose senior officials were named in frauds have taken a serious beating in market share prices. The Indian corporate world is very jittery at present and are revamping organization culture to focus on ethics.

5.      Political Risks

 Indian democracy though largest isn’t the best in the world. Latest reports state that 162 members of parliament have legal charges levied against them and are being investigated. There is a high level of criminalization in politics, which is now getting regularly exposed. To illustrate, the Ex-Chief Minister of Karnataka Mr. BSY Reddy is now being investigated by Lokyukta in illegal mining and other cases.  A number of members of parliament were implicated in scams last year. This has put the government on a back foot and political parties are losing ground.

The confusion in Indian democracy is higher as multi-party system exists and no party has a clear majority in parliament. Government is formed with alliances from other parties. The coalition government is not effective as agendas of various party chiefs have to be met. Hence, the reform bills do not get passed.

Secondly, a number of parties have states control with insignificant presence at national level. Therefore, multinational organizations need to build relationships with political parties at each state to enter into local markets. All permissions for land, infrastructure, and licenses are given at state level.

In nutshell, Indian politics is tough and dirty. The political risks are high and without a proper plan to deal with political risks, the multinationals investment plans can go haywire.

Closing Thoughts

India provides tremendous growth opportunities to multinational companies. The economy is growing by 8-10%. However, to leverage the opportunity effectively management needs to understand the risks. While developing business strategy and doing due diligence, a detailed risk analysis and mitigation plan must be developed. Else, the probability of failure is extremely high.

References:

 Building a presence in today’s growth markets- The experience of privately held companies – By PwC and EIU

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