Analysis of India’s Business Environment

3418 words (14 pages) Essay in International Business

08/02/20 International Business Reference this

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An Analysis of India’s Business Environment through a review of Political, Economic, Regulatory, Social and Cultural Factors

 

Introduction

 

Over the last few decades of the twentieth century, the globalization of the world economy has advanced and intensified. Products and services, we use today have originated from an increasingly complex geography (Dicken, 2015). The aim of this report will be to analyse India’s Macroenvironment.  By reviewing an international market developments’ in Political, Economic, Regulatory, Social and Cultural environments will be assessed.

India is located in Southern Asia, bordering the Arabian Sea and the Bay of Bengal. It Is near the important Indian ocean trade routes and neighbour to China, Bangladesh, Sri Lanka and Pakistan (CIAGov, 2018). Once gaining independence from Britain in 1947 they adopted a democratic system which led to a mixed economic system characterized by a large number of state-owned enterprises, centralized planning and subsidiaries (Hill & Hult, 2015). There are diverse religions, cultures and languages in India, but the English language is the norm with regards to national, political and commercial communications (CIAGov). India’s economic growth has been substantial as its been reported a recent entrant into the trillion-dollar economy in 2012 with a GDP breaching 1 trillion (Hill & Hult, 2015). Although substantial opportunities for foreign direct investment persist in India, it falls behind other emerging economies. However, India’s rate of growth exceeds that of China’s which is a key competitor in the emerging economies (Zattoni et al, 2008).

Political Environment

 A political system can be explained by governmental policies implemented in a nation. It relates to how the government plays a part in the nation I.e. setting monetary policies or restraining government spending. Moreover, the political system can influence both the economic and legal systems (Hill & Hult, 2015).

India’s reforms in 1991 minimized government monopolies, lowered tariff and non-tariff barriers to imports and increased involvement through FDI’s in sectors of transportation, technology and electricity (Bhaumik et al, 2008). Following the reforms developments of multilateral agreements were introduced across South Asia. From 1992-1998 key agreements were set concerning schemes for free trade, frameworks on services, agreements on industrial cooperation and a framework agreement on investment areas (UNCTAD, 2008). These agreements rearranged India’s protectionist attitude, allowing a potential for growth in the economy and opportunities for foreign investment (UNCTAD, 2008). Hill & Hult (2015) express open trade for foreign competition led to increased reforms of foreign equity and allowed foreign ownership to reach 100% in certain cases. Further, they add free trade on raw materials and industrial goods were reduced and maximum tariffs on imports were lowered significantly from 400% to 65%. Moreover, a reduction in corporate tax to 35% in 1997 was introduced and decreases in income tax followed. Reassessing the ownership of government-owned businesses was approached by India, who announced privatization of many government businesses, as 40% were losing money in the 1990s (Hill & Hult, 2015). This growing integration into the world economy has allowed the creation and globalization of Indian enterprises. Indian companies have increased their merger and acquisitions activity, particularly across border acquisitions with the value of deals growing at an annual rate of 28.3% from 2000-2007 (Accenture, 2008).

Indias Country Risk Report explains the political background of India remains fragmented with political parties situated on geographical, ethnic and religious scopes, resulting in violence and terrorism. Religious and ethnic violence has primarily stemmed from the accessibility of opportunities and income disparities. In most religious violence cases the incidents have developed between Muslim and Hindu disputes. In 2002 riots in Gujarat resulted in 790 deaths to Muslims and 254 Hindus, plus thousands had to relocate from destruction to business, property and infrastructure (Fitch Solutions, 2017). Strained relationships with Pakistan and divided citizens in India cause a threat of terror attacks within its borders and outside the country. Mumbai 2008 attacks involved mass shooting and bombing incidents, arranged by Lashkar-e-Taiba, one of the largest terrorist organisations operating mainly from Pakistan. Authorities are also dealing with the Maoist insurgency threat, who are dominating eastern India with its roots generated among low-caste and tribal groups. The threat of terrorism will cast a shadow on India as a region and will remain a consideration for long-term investors (Fitch Solutions, 2017). As India is one of the largest democratic nations the variety of groups must be taken account for the unsettlement in the country and whenever there is a difference in political opinion there are potential political disputes (Hill, J. 2018).

Economic Environment

 

India employed an inward-looking command economy once they gained independence in 1947 (Budhwar & Varma, 2011). Command economies involve the government planning the goods and services the country produce, how much they produce and at what prices they are sold for. Moreover, in a command economy, most businesses are government-owned. Since the 1991 reform, India developed a mixed economy where there are still significant government-owned businesses but there are sectors of the economy left to private ownership and free market mechanisms (Hill & Hult, 2015). This movement into a more liberal process allowed the economy to open up by gradually reducing regulations and delicence the industry (Budhwar & Varma, 2011). Acharya (2008) adds, due to the openness of India’s economy it reached a growth trajectory of 8.8% in 2008. Budhwar & Varma (2011) explain the crucial components to the growth were a sustained investment boom, buoyant global economy and a growth in the technology-driven services sectors.

Bajpai & Sachs (2000) state foreign direct investment is an important non-debt financial inflow, more than ever it is being sought as a mechanism for technology flows, and a form of building inter-firm connections in a world where Multi-national corporations are working in a network of global interconnectedness. Furthermore, they explain the need for MNCs is vital for technology India lacks and is important for remoulding India as an emerging economy. Bajpai & Sachs (2000) declare FDIs from MNCs rely on whether they can take advantage of their regulatory regimes, reservoirs of lower wages, quality of infrastructure and openness of the market.  IBEF (2018) announced the total FDI in India between April-June 2018 stood at $12.75 billion, discovering the government’s reform to ease doing business in India is paying off. Bajpai & Sachs (2000) add these reforms have placed India behind China in terms of market size and expected growth and allowed India’s economy to advance to a GDP growth of 7.3% in December 2017 (Fitch Solutions, 2017).

Motohashi (2015) expresses specifically, technology-driven sectors have benefitted from the influx of FDI and have played a key role in India’s economic growth. Jain (2018) adds India is leading as the hub for offshore IT companies, where the revenues for the IT and BMP industries stood at $154 billion in 2016-17.

Budhwar & Varma (2011) believe the significant growth in the service sector and untapped potential shared with passionate approval for FDI norms is a big opportunity for investors, if they can join forces with local players. In the case of MNC’s in the Indian IT and BPM industry Jain (2018) states HP, IBM and Microsoft are some major players. Hill & Hult (2015) state Microsoft believed the IT industry did not need any concern or developing and an establishment of the Indian development centre in 1998 came from Microsoft working closely with several Indian IT companies.

Regulatory Environment

A countries legal system consists of rules and laws that control behaviour. There is high importance of legal systems in a country for International business, as the country’s laws regulate business practice, determine business transactions and set rights and obligations of those involved in business transactions (Hill & Hult, 2015). Morgan Stanley (2008) state the Indian legal system follows English common law and in theory, provides the highest levels of investor protection in the world. Further, they believe continuing reforms of the legal system in India is to battle licensing, protection and corruption that is damaging growth in the corporate sector.

On the matter of corruption, it is simply defined as the use of public office for private gain (Caiden, 2001; Larmour and Grabosky,2001; White 2001). President Modi of India held a scandal-free government for 3 years, up until being faced with dealing $1.8 billion fraud scandal against the country’s biggest state-run banks (Desai, 2018). This is not the first time such scandals have arisen, where a $1.4 billion defaulted loan scandal happened in 2016, showing there are holes in the legal system which require improvement (Mangaldas, 2018).  Morgan Stanley (2008) believe government officials are often the problem by receiving payments or bribes or acting in the term of “cronyism” where it involves wrongful and corresponding networks through government officials (Budhwar & Varma, 2011). Desi (2018) explains regardless of recent scandals’ corruption is improving since the instalment of Prime minister Modi who pledges to stop multibillion-dollar corruption that has overshadowed previous governments and impacted Indian treasury. Development are displayed by The Transparency global corruption report 2017 who placed India 81st out of 180 countries behind its emerging competitor China but in front of Russia and Brazil. Previously India was placed 85th in the 2008 Transparency global corruption report. This progress has resulted from development in India’s regulatory system who introduced important laws regulating business such as the Companies Act, Patents Act, Copyright Acts, Trademark Acts, Special Economic Zones Act, Labour Laws, Right to Information Act and the Information Technology Act (MarketLine, 2018).

India’s labour laws have been a key topic with regards to private business operating efficiently in India (Hill & Hult, 2015). Ahluwalia (2002) states any firms wanting to close down operations or reduce labour work-force which already has more than 100 employees can only do so with the permission of the government. Additionally, he adds that these legal provisions are more difficult to overcome than in other countries. However, he expresses the government has announced to reform the legal law policy of 100 employees to 1000, but such amendment has yet to be enforced (Ahluwalia, 2002).

Social/cultural environment

Society can be defined as a group of people who share comparable values and norms, which in part are unified by a common culture. Further, a country or state may accommodate one culture or several (Hill & Hult, 2015). Today India’s society has an ever-growing working-age population, growing urbanisation and a mixture of social castes (Fitch Solutions, 2017).

Since India gained its independence from the U.K in 1947 its society has a mixture of social castes, religions, languages and regional territories (Fitch solutions). Currently, India is in a demographic gift phase which is reflected in their rise of working age population (Asher, 2007). India’s total population in 2018 is 1,296,834,042, which places it second behind China with the highest population. India’s highest percentage of the population are in the ages between 25-54 with a total of 41.24%. The future of India’s population is forecasted to continuously grow by reaching a predicted population of 1.47 Billion in 2027. It is likely that India’s population growth will exceed China in 10 years by 14 million and other competitors like Russia and Japan are expected to see their population decrease (Fitch Solutions, 2017).  Asher (2007) demonstrates in The Indian Economic Journal that Indias working-age population will decrease eventually by 2030 but at a gradual rate but will remain to have the highest share of working age population in 2050. Nevertheless, the increase of new entrants into India’s labour market will allow labour costs to stay fairly cheap, furthermore, there is a link between India’s growing working-age population and the domestic savings which in turn allows important growth for India in the long term (Fitch Solutions, 2017).

Population increase In India contributes to the continuous need of urbanisation in the country. From the total population of India in 2017 approximately 33.54% of the population lived in cities, comparing this result to the total of 29.91 % in 2007, India has seen a constant increase every year to the degree of urbanisation (Statistic, 2018). From these cities, the most populated urban areas were New Delhi which is home to 28.514 million and 19.98 million in Mumbai (CIAGov, 2018). Due to the rapid increase in the degree of urbanisation the country is struggling to update its urban infrastructure in sectors such as transportation, sanitation and electricity.

Mckinsey & Company (2010) express the population in Indian cities contain a mix of religions, cultures and a hierarchy of social income classes from the lower sections of the society to the growing middle class that is continuously widening in India. They illustrate 75% of bottom income urban citizens earn an average of $1.80 a day and migration only accounts for a small percentage of increase in urban population. Migration of citizens is partly due to the industrialization of areas. However, this is a major problem as it leads to displacement of citizens and can lead to serious protests, which was the case when Tata had to pull out of developing a new factory in Singur due to protests from agriculture pressure groups (Fitch Solutions, 2017).

Conclusion.

Despite the British empire leaving behind a strong social democracy in India today, it is a latecomer in economic reform, with the significant reform occurring in 1991 (Motohashi, 2015). Ahluwalia (2002) expresses such reforms were prominent in East Asian countries before implemented in India. The Journal of economic perspectives exhibits China witnessing as much growth in the service sector as their industrial sector, with their output per worker annually increasing by 5% over a 26-year period. India, on the other hand, is behind China in their performance, however, the differentiation between both countries lies on India having improvements in total factor productivity by witnessing rate of improvements in output per worker surpassing 5% yearly.

Ultimately India will remain a rapidly growing economy (Budhwar & Varma, 2011). On-going reforms will be key to the growth of this country going forward to take advantage of its large market and high growth potential which has been under-utilized (Fitch Solutions, 2017). However, Issues like corruption, disputes, lack of infrastructure, widening income disparity and legislation put a strain on businesses entering India (Budhwar & Varma, 2011). Understanding such factors are critical to entering the Indian market, in which managing these difficulties can be overcome by entering through collaboration or merger with Indian enterprises, which are increasingly active with cross-border transactions (Accenture, 2008). There are significant investible projects available in the IT & BMP sectors where $2.5 billion of opportunity and 360 projects are available across 76 districts (Jain, 2018). Further, the government have implemented a variety of programmes i.e. special economic zones, location-based incentives and export orientated units (UNCTAD, 2008: Fitch Solutions, 2017). 

Thus, suggesting India as the leading country the London based software company should enter based on comprehensive findings of vast opportunities in the service sector, growing age population and an underutilized economic growth.

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