India has always fascinated the rest of the world. Once perceived as the land of the spiritual and of snake charmers, today it is more commonly associated with IT experts. With a population of over one billion and a growing middle class of about 300 million, India is the world’s fifth largest economy, based on purchasing power. It has been identified as an important emerging market.
To study India is to embrace complexity. And one has to have a clear understanding of its mosaic to be able to do business there effectively. Appreciating the advantages of the country - and the associated risks - will definitely help in making any business venture successful.
India is a vast country, known for the diversity of its languages, religions and food. It is also a country that is on ‘fast forward’, trying to emerge as a key economic and political power in this part of the world. Change is in the air, and economic reforms are the order of the day.
The country has a number of attractions for foreign investors. It come a long way since 1947, the date of its independence from British rule. First and foremost, it is a stable democracy, where peaceful elections to the central parliament, state legislature and local councils are held regularly.
Thanks to its colonial past, English is the language of business, throughout the various states of India. The country boasts a highly independent judiciary, an apolitical army, and high calibre civil, administrative and police services. Western accounting and legal systems operate. Higher education is mainly in English, and India has several well-reputed educational institutions attracting students from neighbouring countries. The system of professional education in areas such as engineering, medicine, accountancy and management, is also well developed.
India’s is predominantly an agrarian economy. Its agriculture is robust, and the country is self-sufficient in food production. Industry is well developed and diversified, and India has emerged as a name to reckon with in several sectors. While there are giant public sector organisations, India also has a long history of private sector enterprises. It has world class undertakings in the fields of oil and gas exploration, petroleum and petrochemicals, power (thermal, hydro and nuclear), steel, automobiles and auto components, textiles, pharmaceuticals and software development. It also has a well-developed physical, industrial and fiscal infrastructure, and an established stock market with more than 6000 companies listed.
India launched into economic reform in the early 1990s. Since then, there has been no looking back. While the pace of reform may not be to the liking of the business community, it should be understood that what has been achieved is indeed creditable, especially against the backdrop of the country’s past experiments with socialism, public sector enterprises and political parties of different hues. To carry the consent of such a vast multitude of people has been no easy task. However, successive governments, from different political bases, have remained committed to economic reforms.
India has abolished several of the controls and restrictions governing entry of private sector and foreign investors and has eased the norms for private and foreign participation. Sectors such as oil and energy, telecommunication, automobiles, and insurance have been opened up completely.
The key economic indicators are healthy and have remained fairly stable. While the gross domestic product growth is at 6 %, the export growth is over 20%.
KEY ECONOMIC INDICATORS
Area 3.287 million sq.km.
Population1.007 billion
Gross Domestic Product
(at current market prices)US$454 billion
GDP growth rate 6%
Gross National Product
(at current market prices)US$449 billion
GNP (PPP)US$2144 billion
Per capita GNP (PPP)US$2149
Gross Domestic Savings22.3%
Inflation 5%
Value of output by manufacturing sectorUS$159 billion
Power Capacity 96682 MW
Foreign trade deficitUS$19700 million
Exports US$44.400 billion
Foreign Capital inflow US$7461 billion (2000-01)
India’s key strength lies in information technology, and here the country is well-equipped to offer world-class products and services. It is no wonder that many international organisations such as GE and Ford are looking at India not only as a manufacturing base, but also for their management services. However, together with the strengths listed above, India is still vulnerable on several fronts. What are the key risk management issues?
Economic
India is a developing country and the focus has hitherto been on economic development and employment creation. Attention given to performance has been more on resource optimisation and operating efficiencies. The country has yet to address strategic issues in terms of high technology facilities. Considerations such as creating regional parity and maximising employment have overridden sound business principles. A number of such initiatives have been based largely on political compulsions.
As the country is only in the first phase of economic and industrial development, disposable incomes are still meagre and basic needs, such as housing, are still to be met for many. Security, in the form of insurance, is not perceived as a necessity. This is indicated by the low insurance density of 6.4 (compared to 1694.2 in UK, 2268.4 in France and 1899.2 in Germany) and low insurance penetration at 2.01 (10.33 in UK, 8.55 in France and 6.42 in Germany).
The relationship between the level of economic development and risk is well known. With accelerated economic development, technological advances and globalisation, come greater loss exposures and their attendant risks. Growing industrialisation and economic development in India mean that the risks are expected to multiply, and the need for sophisticated risk management measures emerges.
The trends are already evident - growing urbanisation, complex industrial operations, pollution and the changing attitude of people to risk brought on by higher educational levels and longer life expectancy. With its limited resources, India cannot afford to ignore managing its risks well. The recent earthquake in Gujarat and the super cyclone in Orissa have focused attention on the need for sound disaster management.
Political
India’s post-independence political leaders worked out a development model based on a concept called ‘mixed economy’, embracing both public and private enterprises. The system was regulated through governmental controls in the form of licensing, tariffs and so on. However, the realisation has dawned on all, especially the political class, that India can no longer afford to be inward looking and must integrate with the rest of the world. The concern that foreign companies would dominate the market or wipe out local players, and that there would be dangerous outflows of foreign exchange have given way to an understanding that competition improves efficiency and will do greater public good.
India’s democracy, with its multiple political agendas, has sometimes been its bane. It takes enormous time to seek and obtain consensus on key political and economic initiatives. With some of the parties still remaining loyal to communist and socialist doctrines, resolving issues such as privatisation, or the relaxation of administrative controls involves time-consuming and tedious processes. The situation is, however, changing for the better, in that all major political parties in India have come to realise that economic development alone can bring prosperity and growth for its high population.
The political risks are that among the numerous political parties are some with chauvinistic policies. To date, there has been no risk of contract repudiation and frustration, nor confiscation by the state. Money and muscle have come to play significant roles in political management. Political risk insurance is not yet available in India, on the lines of that available in European Union.
Legal
India’s legal system is based on the UK model. However, it suffers from the maladies of delay and from the consequent high cost of litigation.
The country has enacted several laws to protect organisations, individuals and society. The Companies Act, Consumer Protection Act, Factories Act and various Environmental Acts are some of the most important. The country also has an Arbitration Act , while also allowing for other forms of dispute resolution.
Common law liabilities are covered by various laws, such as the Workmen Compensation Act, Public Liability Act, and Motor Vehicles Act (for automobile third party liability). Insurance is available to cover product liability and warranty claims.
The Contract Act 1872 is the primary act governing contracts and their performance. Intellectual property rights are governed by the Patents & Designs Act, Trademarks Act and Copyrights Act.
Financial
India has a number of investment and development institutions, commercial banks, housing financing institutions, co-operative banks, rural banks, mutual funds, life and general insurance companies and pension funds. Both private and public organisations participate. The level of trading in securities is sophisticated, with on-line, screen-based trading. Indexed futures and derivatives have just been introduced. The insurance industry has newly been opened up to private sector participation, and many of the local majors have teamed up with international organisations such as, AIG, Prudential, Royal Sun Alliance, Tokio Marine and Allianz.
There is a great degree of consolidation in the financial services industry through mergers and acquisitions, and alliances. Some of the bigger institutions are trying to integrate their portfolio of financial services and evolve as universal banks and bancassurance companies.
In attempting to reduce its role in offering individual economic security, the Government has introduced a number of tax advantages to promote investment and insurance. The operations of this sector are regulated by the Ministry of Finance and by several regulatory authorities, such as the Reserve Bank of India, Company Law Board, Central Board of Direct Taxes, and IRDA.
To ensure greater compliance, efforts are afoot to make the system simple and more transparent. Several organisations with exposure to foreign markets and lenders have attuned their financial management practices to adhere to international accounting norms such as the US GAPP.
Currency convertibility has yet to be extended to capital account. An export credit guarantee corporation underwrites risk on exports. Domestic credit risk is another area of concern, especially during recessionary times, and insurers are only just beginning to make products available to underwrite such risks. Credit rating has become an important aspect of fund raising, and this augurs well for the future.
Regulatory
Knowing full well that liberalisation is not the same as abdication, the government has set up a number of regulatory bodies, such as the Securities Exchanges Board of India (SEBI) on the lines of Securities & Exchanges Commission (SEC) in the US, the Central Electricity Authority (CEA), the Telecom Regulatory Authority of India (TRAI) and the Insurance Regulatory & Development Authority (IRDA) for efficient handling of different sectors. These bodies monitor business practices, and ensure capital adequacy, solvency margins, liquidity and other key operational parameters.
There has been increased emphasis, through amendments to the Companies Act and Stock Exchange listing requirements, on proper and more frequent disclosures and transparency. A number of initiatives on corporate governance have been undertaken, and there is a move to form a corporate governance institution to promote the practice. The country has recently set up a Competition Commission to handle monopolies, unfair trade practices and takeovers.
Technological
Although much of India’s technology is below world standards, organisations are investing in modern manufacturing practices. There are several organisations in petrochemicals, pharmaceuticals, automobiles and software that can boast of world class facilities. ISO 9000 standards, TQM and TPM have become the mantras for many organisations bent on improving operational efficiency. Stricter compliance with environmental standards is being enforced, and organisations are gearing up to obtain ISO 14000 and OSHA 18000 certification.
Social
India is country of numerous languages and religious faiths. Social ties are very strong, and a great deal of importance is attached to marriage and family. Indians are generally peace loving and gregarious. Gruesome crime is quite rare.
The people are generally tolerant and contented, have strong faith in ‘karma’, and are generally risk averse. They are also superstitious and are reluctant to buy insurance. There is an enormous amount of inertia to change. Business ethics are valued, and brand loyalty is quite high.
Destination India :
Notwithstanding the risks, India is a progressive and vibrant country, where values and ethics are held important. As the economy grows, there will be a greater need for professional management. Exciting times are ahead in India!
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Manivannan R Rajan is executive director with Integrated Risks Management Services Pvt. Ltd, E-mail: m_rengarajan@yahoo.com
AIRMIC COMMENT
India has traditionally been a no go area for multinational insurance programmes, says David Ketley, a former AIRMIC chairman and Insurance Manager, Europe & Far East, Cargill. “Strict regulation of insurance by the General Insurance Council meant that all insurance in India had to be placed with one of the state-owned insurers while tariff rating meant that the only option was the standard of service.
“Things are slowly changing; overseas investment in local insurance companies is now permitted, but only up to a point. This may lead to a change in working practices and streamline some of the labour intensive operations (last year the National Insurance Company was said to have 22,000 employees), but so far little has changed to help the multinational captive programmes.
“Non admitted insurance is not permitted and it is still virtually impossible to export premiums, even by way of reinsurance ceded to a captive. The National Re. still takes a mandatory quota share of all business. Historically, brokers were not permitted but risk management advisers have evolved.
“Maybe India will deregulate as Japan has done, but I for one am not holding my breath.
AIRMIC COMMENT
India has traditionally been a no go area for multinational insurance programmes, says David Ketley, a former AIRMIC chairman and Insurance Manager, Europe & Far East, Cargill. “Strict regulation of insurance by the General Insurance Council meant that all insurance in India had to be placed with one of the state-owned insurers while tariff rating meant that the only option was the standard of service.
“Things are slowly changing; overseas investment in local insurance companies is now permitted, but only up to a point. This may lead to a change in working practices and streamline some of the labour intensive operations (last year the National Insurance Company was said to have 22,000 employees), but so far little has changed to help the multinational captive programmes.
“Non admitted insurance is not permitted and it is still virtually impossible to export premiums, even by way of reinsurance ceded to a captive. The National Re. still takes a mandatory quota share of all business. Historically, brokers were not permitted but risk management advisers have evolved.
“Maybe India will deregulate as Japan has done, but I for one am not holding my breath.