Common Risks of Doing Business in India

For foreign companies, the common risks of doing business can be divided into economic, political, legal/regulatory, and business risks. While manyIndia watchers pay disproportionate attention to political and legal risks, we at Amritt base our assessment on the recent experience of foreign players in India and our projections of how India functions uniquely and differently from other countries.

Business Risks

The biggest business risk for Western companies entering India is lack of preparation. India offers huge rewards to executives and companies that take the time to understand and respect it business culture but can be frustrating to those who think that they can make a quick buck there.

The second risk  for doing business in India for a new entrant is to assume that India is like China or another Asian country.  The business culture of South Asia is distinct from the rest of the continent. With 23 official languages, India is more like a continent than a country. For example, Punjabis from Ludhiana in the north function very differently from Malayalis from Kochi in Kerala.

The third risk with India is impatience. If you are not committed to success in India, don’t bother to start. It’s a marathon not a sprint.  Few companies succeed without major setbacks in India and most companies experience some serious surprises despite the best preparation.

For foreign companies getting started in India, the fourth major risk is losing your key talent. In a growing economy, the competition for top talent is intense. Also if your team in India starts to feel that the corporate headquarters is not sympathetic to their unique concerns and worries, they become disenchanted more readily.

Legal/Regulatory Risks

Number Five on our list of common risks of doing business in India has to do with falling afoul of the law in India or in the home country. Many times this can be related to corruption such as the American Foreign Corrupt Practices Act or the Indian Integrity Pact for major defense purchases.

The sixth common risk of doing business in India involves changing or unpredictable regulations.  Arcane portions of the law can be dredged up by state or federal authorities to challenge a local or foreign company in an unexpected manner. This happens rarely but can form a significant setback. Vodafone, for example, was presented with a multi-billion dollar capital gains tax bill which they did not expect after they purchased cell phone assets in India via a Hong Kong transaction in 2008.

Political Risks

India is a stable democracy so there is virtually no risk of the country failing.  Even if the ruling party or leader changes, most business related laws and policies generally maintain continuity, especially since liberalization.  Pressure from the public or specific interest groups are sometimes responsible for political backtracking that has affected foreign companies; the decision to permit foreign investment in the retail sector in 2011-2012 took a convoluted path for example. Russian Systema, Norway’s Telenor, Abu Dhabi’s Etisalat and Japan’s NTT Docomo were swept up in a major telecom scandal in 2010 which led to the cancellation of 122 spectrum licenses

India has had armed conflict Pakistan and with China and there is always the small chance that hostilities to escalate again the future. Border disputes are not fully resolved between the countries.

Economic Risks

India has Asia’s oldest stock market and a fairly vigorous regulatory system for equities and debt. The economic risks of doing business in India have more to do with inflation and with lack of fiscal discipline at the government level. Huge transfer payments to the rural poor, subsidies for food and fuel, and disproportionate raises for state employees and retirees have bled the economy from time to time. Foreign companies need to watch exchange rate risks and interest rate risks carefully in India.

Many other risks are specific to the company, the industry, the location and the state of the competition. It’s best to see bi-culturally savvy guidance to identify, manage and mitigate the risks of doing business in India.

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