India is an important market for the international business community. But while India’s positive economic outlook and regulatory reforms have made it an attractive investment destination, there remain formidable challenges for foreign investors doing business in India. Ascertaining, grasping and preparing for these challenges is vital for success in the Indian market. Lex Witness Bureau brings a snapshot…
What are the prerequisites to a successful business? Strategic planning, legal and business due diligence, consistent follow-up, and most importantly, patience and commitment, are a few notable ingredients. This leads us to the debate of how difficult is to do business in India? In 2010, India ranked 133rd in “Ease of Doing Business Index”, which is a setback when compared with China’s 89th and Brazil’s 129th position. Studies suggest that India’s biggest problem is slow enforcement, which is aggravated by labour inflexibility, poor infrastructure, bureaucratic red tape, lack of respect for intellectual property rights, and rampant corruption. Besides, India calls for addressing varying regional standards, languages, cultural differences, and levels of economic development. Additionally, despite the opening up of the Indian market, many tariff barriers remain. While accessing India’s markets, investors need to factor in all of these aspects, which are constantly evolving. The World Bank has suggested that the most important priorities for India are public sector reforms, infrastructure, removal of labor regulations, reforms in lagging states, to name a few. Clearly, there are risks. But so are the rewards for the savvy investor. Industry watchers believe that those who are still waiting for India’s legal system and overall business environment to become more predictable before venturing to make investments should not wait long; for they are missing out on one of the greatest economic explosions of the recent times.
The challenges are numerous given the size, social fabric and the diversity of India. It is a known fact that the ‘culture’ of the business environment in India is vastly different from that of the West despite there being a highly conducive business environment. We take a look at some of the notable challenges of doing business:
Trade policies of national governments are aimed at protecting the domestic industry from the competition of developed economies. Thus, trade barriers are created to encourage domestic players by making it more difficult for foreign firms to compete. Traditionally, India has had several types of trade hurdles for foreign exporters, such as, Import Quotas, Subsidies, Trade Samples and Tariff/Duty. The most critical barrier to trade is tariffs or the tax imposed on imports. High tariffs in several sectors continue to bar foreign businesses from increased market access. Although post economic-liberalization, there has been a gradual reduction in basictariff, India’s tariff ratios continue to be one of the highest in the world. The customs tariff and excise tax systems also remain confusing. The Government of India, on the other hand, is of the view that further liberalization will depend on the extent to which its trading partners will commit to reductions in export subsidies and domestic support. It is argued that substantive benefits to developing countries like India will accrue only if the developed countries eliminate the tariff peaks and tariff escalations that are rampant in crucial sectors ranging from textiles and leather to marine products.
The attitude of the host government towards foreign investors is an important factor for doing business in any country. Traditionally, Indian bureaucracy has been mired in red tape which proved to be a frustrating experience for foreign investors. These include limited access to Government offices, cumbersome and multitude paperwork, lack of coordination between various departments processing the documentation, long waiting period for approvals, and above all ambiguous rules. However, with the economic reforms of early 1990s, the level of bureaucratic hurdles which the MNCs had toovercome, gradually reduced making it easier to do business. Having said that, there are some areas which leave a lot to be desired. For instance, a critical factor that affects the level of bureaucracy is the state in which the investment is carried out. Invariably, the Central Government’s reforms do not necessarily permeate uniformly across all states and down to local levels. The result is that policies aimed at attracting investments vary from state to state which impacts the confidence of the foreign investor. Political and regulatory risks also pose a major challenge, as investment in sectors which entail constant interface with various regulatory authorities expose the investor to delays in implementing the project, which in turn affects their viability and profitability.
Corruption is another big hurdle when doing business in India. In the Transparency International’s Corruption Perception Index, a study measuring perceptions about corruption, India has been repeatedly ranked within top 100 corrupt nations. Areas like electricity supply, judiciary (particularly lower courts), Police, land administration are counted in the most corrupt category. Since all these are essential in building up a business, corruption proves to be a major hurdle for starting business in India. Politicians, bureaucrats, criminals, andeven businessmen are involved in corrupt practices. But corruption is not unique to India. It is rampant in all societies where there is a scarcity of services/goods, red tapism, lack of transparency, etc.
India is undoubtedly an important market, but there is not much and proper dissemination of information about India’s vast potential as a market and as a global player. Our trade offices based overseas as well as the export promotion councils should play a greater role as to how the business opportunities can be accessed and tapped.
Needless to say, there are formidable challenges of doing business in India for the reason that what is on paper is often not practiced! Procedures have been simplified, albeit only on paper. In practice, there are bottlenecks galore. To add to the woes, there is no clarity and certainty about procedures. For instance, notifications of frequent changes in policies and procedures keep on gushing out from various government offices, thereby adding to the confusion. What is needed is a change in the Government’s mindset in order to keep pace with the frequent legislative changes.
India is certainly an interesting market with a huge potential, however, there are umpteen hurdles/ challenges faced by the international business community while accessing the ‘Indian Market’, such as copious regulations, policies and approvals. For instance, for something as simple as opening up a bank account in India by a foreign national or a foreign corporate requires bountiful documents and so is it time consuming, a practice unlike in many other nations. To rectify such situations, it is imperative that the ‘Indian Market’ must create its visibility by publicizing / marketing well in the international business community. Further, it is also of the essence that the regulations / policies be made more investor friendly, in terms of allowing international business community to explore business options. The onus to trounce such a challenge lies equally on both – the Indian corporations as well as the Indian regulatory authorities– by downsizing the requirements and offering a level playing field for the international business community.
The Indian business environment is still under progress. Not only there are umpteen regulations/policies, there are also inconsistent policies and rules, labour regulations and protections, regulation onforeign investment, foreign exchange control, etc. The political system and the political decisions from time-totime on various policies and regulations add on to the problems facing foreign investors doing business in India. Every day political decisions are being made which can have an effect on all of us. Governments make the rules and structure in which businesses race against each other. Thus, politics and laws play a critical role in international business. National politics affect business environment directly through changes in policies, regulation and laws. Building relationships is another aspect to be considered while doing business in India. Indians prefer to make favourable deals with only those people whom they know and rely on even at the expense of lucrative deals. It is very essential to build a good working relation with a partner you deal with. This must take place on a business level, i.e. demonstrating strong business acumen, and at a personal level, i.e. relating to your partner and exhibiting the positive traits of trustworthiness and honour. After its phenomenal success in the information technology sector, India needs to stoke an innovative culture given that the legal framework as on date discourages continuation and deepening of international partnerships. There is also an urgent need to expand research and development activities in India. Last but not the least, it is imperative to understand political and legal factors on a variety of levels before entering into the ‘Indian Market’
I would disagree with the statement that only few from the international business community know how to access the opportunities here. In fact we have had many multinational companies in diverse sectors operating in India even prior to the 1991 liberalization, for example Unilever, Proctor & Gamble, Colgate, Bayer, BASF, Siemens, Cadbury etc. Today along with Pepsi & Coke we have all major European, US, Japanese auto car companies, and all foreign banks operating in India. In fact they understand the Indian consumers and the market more than even our typical Indian companies. However, I must add that because India is geographically a vast country with poor infrastructure it becomes extremely difficult to organize logistics support to market products. Also dealing with multilingual large population is a big challenge. I reckon with the thrust on infrastructure development and basic education, the government is moving in the right direction.
During the last 20 years of liberalization we have carried out major reforms and have made India a truly attractive investment destination. However, two formidable challenges for doing business in India are, (a) lack of openness and transparent policy and decision making whether from the government departments or other specific industry regulators; and (b) the delay in the judicial system. The third big challenge is to deal with corruption. We cannot afford to label our country as a country of scams & scandals! The credibility of our country is at an all time low which I believe is a very serious issue. It is not as if we do not understand our problems, or that we do not have solutions. We will have to show firm political will and deal with these basic issues. We have come a long way, but there is a lot to travel.
It has long been felt that roads and communication in India need substantial investment in order to make them world class. Although improvements are being made, there lies a huge task ahead. Problems with the country’s education and power situation are also counted amongst the toughest obstacles for doing business. Since the Government faced difficulty in raising funds for infrastructure development, a conscious effort was made to form partnerships with the private sector. Development of this sector was kicked off, led by a liberal environment in the information technology, aviation, and telecom sectors. Today, there is an increased private participation in ports, roads and other key sectors. At the same time, some MNCs are utilising India’s lack of infrastructure as a business opportunity, especially, in the areas of architecture and town planning. Infrastructure development has emerged as a niche market for foreigninvestors in India with several states looking to build world class infrastructure. The problem area is the absence of a clear-cut policy framework, which has hampered private investment in the infrastructure sector.
Labour laws are perceived as bottlenecks for doing business in India. Study of industrial laws as well as the prevailing jurisprudence in the country shows that not only is the law rigid from the perspective of the employer, it also fails to vest the employees/ workmen with rights required for playing a meaningful role in the business entity. Even the judiciary has envisaged a limited role for the workforce in corporate affairs and company management. Although India’s labor force is growing every year, the labor regulations are onerous even by developing country standards. Not surprisingly, analysts have been urging the government to abolish them. Industry bigwigs also point towards the lack of a flexible labor policy as an important impediment to India’s growth.
More specifically, while terminating employment contracts, investors need to comply with diverse set of laws, including, inter alia, Industrial Disputes Act 1947, Shops and Establishments Act, and other state specific employment orders. All these laws lay down rules for employment and termination. It thus remains difficult toterminate workers, with the 1947 Act mandating state governments to require manufacturing firms with over 100 workers to gain governmental approval before laying-off workers! Thus, policies should be designed to remove restrictions on laying-off workers, as well as to moderate benefits obtained by unions.
Intellectual property (IP) rights encourage innovation and creativity thereby contributing to economic prosperity of the nation. Although India has a well defined IP regime, it has lot of catching up to do as far as protecting IP is concerned. Why does IP protection continue to be weak in India? To begin with, it is contended that the Indian copyright law and its protection is weak. Piracy of copyrighted works, especially music, movies, software, books, is rampant. Software piracy in particular is a grave issue in India. Statistics show that the value of the Indian IT industry is over $70 billion to which software and services contribute a major portion. It is estimated that the losses faced by the Indian IT industry last year due to software piracy was around $2.03 billion. Studies indicate that enforcement needs to be improved for preventing transit across borders of counterfeit and pirated goods, as well as strict police action against pirates and counterfeiters. Experts believe that local policemen should be given the power to arrest pirates. In some countries like Greece, Italy, and Cyprus, piracy is treated as tax evasion, which should be considered in India too. Besides, the judiciary has an important role to play byway of pronouncing rulings which result in convictions for trademark and copyright infringement and imposing sentences which act as deterrents!
Corporate taxation is an essential aspect of doing business in India and its importance cannot be undermined. For companies and businesses entering India, an important tax implication is that of tax treatment of overseas M&A (merger and acquisition) transactions. Corporate tax rates are continuing to fall worldwide. Infact, in other Asian countries’ corporate tax rates are significantly lower than that of India’s. These countries with their lower corporate tax rates they are providing stiff competition to India in attracting foreign investment. While today several MNCs are doing business in India, the tax treatment for such companies has been varied and unpredictable. Experts also point out that in India, MNCs, across a broad spectrum of industries, are burdened with ever-increasing number of tax audits and prolonged tax litigation on account of failure of tax authorities to apply tax treaties or follow internationally-accepted standards in treaty interpretation and transfer pricing. But perhaps what is most lacking is the absence of clarity on tax treatment of overseas M&A transactions. The current tax legislations do not provide for the concept of levy of tax on transfer of beneficial ownership in a cross-border transfer. The tax authorities in India are of the view that, in a cross-border transaction, gains arising out of transfer of shares of overseas entity attributable to the operation of the Indian entity should be subject to tax in India, in light of the business connection of theoverseas entity with the Indian entity. However, there have been calls from various quarters to give comfort to the international investors by introducing clarity in the domestic tax legislation that such overseas cross-border deals/sharetransfers will not be subject to tax in India.
India is indeed one of the most important markets in the evolving Global economy. This is evident from the fact that the rate of FDI in India has been noticeably increasing over the years. India (along with China) is discussed in almost every seminar/ conference which speaks about global economy. As regards the issue of accessing the opportunities here, I do not think that doing so is as difficult as it would appear to be. Information regarding investment opportunities can be quite easy to access. This can be done by firstly verifying within the organisation if the organisation has any prior experience in accessing Indian markets. If not, the organisation can approach its advisors (legal, financial consultants, etc.). Further, almost every major legal or consulting firm (financial or otherwise) such as KPMG, E&Y, Boston Consultancy, Allen and Overy, Linklaters, etc. have market reports and general reports on doing business in India. These are readily available on the Internet. Further, market reports undertaken by various governmental/ regulatory bodies or other business entities are also readily available online. Sometimes, the major players in every sector also have market surveys of that particular sector which may be available on their websites. Hence, there are plethora of sources from which information regarding accessing the Indian market can be accessed.
The three major challenges for foreign investment in India are: (a) regulatory uncertainty, bureaucracy that is difficult to deal with and lack of transparency – these factors give a perception that the environment in India is business unfriendly, lack of transparency also fuels corruption; (b) slow dispute resolution process; and (c) inability of the regulatory framework to evolve at the pace the business practices are evolving. Bureaucracy is the single largest detriment for foreign investment in India. Further, the lack of transparency in regulatory proceedings, which is seen as a major factor for fuelling corruption, also acts as a significant detriment.
As regards the tax policies, I do not think that the tax policies are difficult. For instance, the USA has more difficult tax policies. However, the tax authorities have in the recent past interpreted existing laws more aggressively that have led to the perception that the Indian tax policies are difficult (e.g. the Vodafone case). Further, the aggressive and inconsistent stance taken by the tax authorities has also fuelled uncertainties. However, these will not have a long term impact on doing business in India.
Italy looks with great interest at the constantly growing Indian economy. At the same time, India is certainly charmed by Italian brands and Italian specialised techniques in many industrial fields such as plant design, energy and telecommunication. This means there are enormous opportunities of investment for the two nations. This is very clear in the minds of both Italian and Indian entrepreneurs and politicians. This is the reason why the Indian Minister for Trade and Industry together with the President of the Indian Entrepreneurs Association, and a number of Indian companies – among others: Hinduja (construction and energy) MW Corp (renewable) Satya Paul Gurgaon (fashion) and Bharat Hotels (tourism) – recently met with the Italian Minister of the Economic Development, the President of the Italian Entrepreneurs Association, and a number of Italian companies such as Ferrero, Lavazza, Magneti-Marelli and Astaldi, at Rome (Italy). In order to boost business between the two nations, a Business Council between the Indian and the Italian Entrepreneurs Associations will also be set up. A further meeting among the concerned parties is scheduled to be held in India in October 2011, when the aforementioned Business Council will be formally introduced.
India is one of the biggest democracies of the world and it is forecasted to become the third largest economy of the world by 2020/2025. At the moment, the value of the mutual investment between Italy and India is 6 billion Euros. However, as pointed out during the above-mentioned meeting between the two sides, approximately 640 billion Euros are now available for investment in India. Italian companies may play an important role in this rapidly growing process, by operating in a number of fields of the Indian market such as construction and infrastructure, food industry, energy, tourism and also education. As a business lawyer, I would like to affirm that this is an extraordinary challenge for both foreign investors and local partners.
India has an effective legal system based on common law. However, the backlog of cases in the courts causes delays and challenges for foreign companies doing business in India. Pursuing litigation entails inordinate delays, with court casessometimes taking several years to reach resolution. Not surprisingly, as per Business Week “It is well-known that Litigation in India is a no-go zone for companies because of how long it takes.” Infact, while doing business in India it is critical to understand that the courts need to be the last resort to settle disputes. Thus, engaging India’s business culture with an ongoing strategy and understanding clearly how to continue a relationship is critical to success. Using strategies similar to the ones prevalent in West, where litigation is a fact of life for corporations, will not work in India unless one is willing to patiently wait for the judicial outcome. For large-scale projects, foreign investors may encounter public interest litigations (PILs) and adverse media reaction and should be thus prepared for these eventualities. Thus, companies involved in complex projects should allow for delays when developing their timelines and also factor in the legal costs that are likely to be incurred in the process of setting up businesses. Further, while it is advisable to have a written contract, it is even better to forge business relationships with “credible, trustworthy and proven” partners. Infact, rather than threatening contract violations, one can opt for any of the modes of alternative dispute resolution (ADR), for instance, negotiations and arbitration.
Doing Business 2011: Making a Difference for Entrepreneurs, the eighth in a series of annual reports published by IFC and the World Bank, reports that in 2005 alone India implemented 18 business regulation reforms in seven areas, therebycreating more opportunities. Interestingly, both China and India are among the top 40 most-improved economies that made significant changes in business regulation at a steady pace making it easier for firms to operate.
Although India has not been very successful in reducing trade barriers significantly, the average tariff rate has declined over the years. On the investment front, there has been significant progress in reducing barriers to FDI. Foreign investment is now permitted in a range of industries, including manufacturing sector and urban infrastructure. In the financial sector as well foreign participation is allowed in banking, securities and mutual fund industries, although in comparison to other emerging markets governmentownership in financial sector remains high. Having said that, the reforms in the financial sector have led to relatively well functioning capital markets. These include abolishing cumbersome approval requirements for financial transactions, and liberalizing capital markets through the abolition of the Controller of Capital Issues, which controlled all funding activities of large manufacturing corporations. India’s FDI success story is well-documented with the private sector becoming an active participant in several key sectors. For instance, in the telecommunications sector, the provision of cellular mobile as well as fixed service is now open to the private sector, including foreign investors, pursuant to which the telecommunications services in India are mushrooming. Additionally, private participation, with limited success, has been tapped in improving airports and road networks. There has also been successful privatization of a small number of ports and roads. Progress has also been made in several other areas which were previously “off limits”, as in the case of insurance, which has now been opened to private participation, both domestic and foreign.
The much-debated fiscal reforms of the country have focused on rationalizing the tax structure and increasing compliance. Specifically, the reforms have lowered tax rates (individual, corporate, excise and custom), broadened the tax base, removed exemptions and concessions to reduce distortions, simplified laws and procedures to close loopholes and increase compliance (including using technology to better track tax payments). As far as labour reforms are concerned, there arefewer labour strikes today and employment contracts now generally include clauses on productivity. Even judicial judgments are no longer reflexively in favor of labor, as was the case in the past. Moving on to IP protection, today it has become a priority for not just the businesses, but for Government as well. India continues to make gradual progress on efforts to improve its legislative, administrative, and enforcement infrastructure for IPR. IP offices continue to pursue promising modernization efforts. There have also been attempts to reduce patent application backlogs and streamlining of patent opposition proceedings. Some industries report improved engagement and commitment from enforcement officials on key enforcement challenges such as software and book piracy. The need of the hour is now to provide stronger protection for patents.
Although experts would argue that the government continues to limit manufacturing growth of the country, industrial sector reforms have managed to open up the economy broadly to competition. Besides, reservations for some small-scale industries have also been reduced. Lastly, recent trade policy reforms have reduced import duties from rates that were once the world’s highest! Tariffs have been reduced, besides liberalising trade in service and technology industries. Despite India being accused of having an efficient form of corruption, attempts to reduce corruption are being implemented at multiple levels of Government. To cite an example, with the enactment of the Right to Information Act 2005, government officials are obligated to make information sought available to the public or else face fines. More recently, as part of a broader effort to tackle corruption, the Government has recently ratified United Nations Convention Against Corruption (UNCAC)- the only legally binding international agreement targeting corruption. The UNCAC ratification is aimed at tackling corruption and stemming the flow of illicit capital flight which is estimated at approximately USD 19 billion per year.
For those contemplating to do business in India, it is crucial that they are wellinformed of the ground reality in order to make calculated investments. The knowledge about doing business in India has to be constantly updated, and adhering to biased or clichéd views is not advisable. Above all, it has to be recognized that the Indian business environment is inchoate, with business conditions varying from state to state, industry to industry, and even region to region. The silver lining is the increased openness of the Government towards international collaboration by way of building partnerships with the developed nations across a wide range of sectors. It is anticipated that this increased engagement will go a long way in creating a positive environment. The savvy investor realizes that the opportunities offered by an emerging market like India are tremendous. But so are the challenges. Notably, the business environment in India can be and is frequently conflicting. On one hand are the benefits of large cost, on the other there are costs an investor can be unprepared for. While there is tremendous intellectual capital, there also exists a sizeable consumer base that is largely illiterate. Similarly, while the capital markets have matured, the family ownership and management of a plethora of listed companies fails to inspire investor confidence. The touchstone is to accept this dichotomy as an integral part of the Indian business landscape and work within it.
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