Identifying And Mitigating Risks Associated With Doing Business in India

  • 17 July 2021
  • By MNS

Problems arise in both developed and emerging markets, which can be foreseen or unanticipated.

Regardless of political concerns, businesses can mitigate risks and issues by diversifying income streams (i.e., operating in various markets). The way in which firms expand, on the other hand, is critical. India’s cultural and economic diversity has a long history. Nonetheless, in recent years, India’s security environment has shifted, and a number of new worries have emerged.

The objective of the study was to get a sense of the dangers that exist throughout the industrial range.

Economic, political, legal/regulatory, and business risks are the most common risks that international firms face while doing business.

Rather than focusing on political and legal issues, many watchers of India should strive for and concentrate on forecasts of how India operates distinctively and differently from other countries.

(A) The Positive Aspects Of Doing Business With a Company From India

  • Diverse Occupants: Yes, Indian managers and The India Way of Doing Business are responsible for a number of distinct characteristics.

To begin with, unlike in other countries, Indian businesses are primarily run by family promoters. Not only is India one of the world’s fastest-growing economies, but it is also undergoing unprecedented economic liberalization, allowing foreign businesses greater access to its enormous and diverse market than ever before.

Expanding enterprises will find a huge, young population and a robust export sector, as well as a prospective consumer base.

  • Irrefutable Factor: In terms of purchasing power parity, India is now one of the three largest Asian economies.

In comparison to other Asian countries, India’s population has a median age of 25, putting it in a very favorable demographic position.

According to the United Nations, India’s working-age population (15-64 years) will grow by 135 million in ten years, or by 2020.

  • India’s Strengthened Position: This is due to the country’s high birth rate, which is expected to continue until roughly 2050.

The key to India’s future development is a young, enthusiastic, and well-educated workforce. This favorable demographic period offers India a considerable competitive advantage in the modern knowledge economy.

  • Progressive Indians: There is a large pool of well-educated, English-speaking management talent available.

In general, candidates seek positions that are stable and long-term. Jobs on a contract or for a set period of time are typically chosen as a last resort. Employees can be assertive and straightforward, and it is essential that you treat them as such. Honesty and humility are qualities. In the workplace, women are treated with respect.  In most Indian companies, they win respect and feel comfortable and protected.

  • Being Straightforward – Investing with a company from India and repatriating profits or other benefits is usually a simple process. In India, foreign corporations can easily raise equity capital, and many have subsidiaries listed on Indian stock exchanges. In many major Indian towns and airports, you may easily meet people who speak English and purchase English language books and magazines. If you speak a major European language like Spanish, German, or French, you’ll find people who speak it in big Indian cities.

(B) The Negative Aspects Of Doing Business With a Company From India

  • Starting a business in India is difficult due to the high costs compared to other regions of the world. Taxes are higher, and the government imposes rules that make things more difficult.
  • The second risk for a new entrant conducting business in India is assuming that India is similar to China or another Asian country. South Asia’s business culture is distinct from that of the rest of the continent. India is more like a continent than a country, with 23 official languages. Punjabis from Ludhiana in the north, for example, behave significantly differently than Malayalis from Kochi in Kerala.
  • India boasts Asia’s oldest stock market and a fairly robust stocks and debt regulation regime. The economic hazards of conducting business in India are largely related to inflation and the government’s lack of budgetary discipline. Large transfers to the rural poor, food and fuel subsidies, and disproportionate raises for state employees and pensioners have all bled the economy over time to time.
  • Despite the fact that India has opened its borders to foreign trade, there are still a number of challenges to overcome when importing and exporting commodities. Multiple layers of bureaucracy make moving commodities efficiently difficult, and enterprises must file a vast number of documentation before moving items across borders.
  • While India shows potential and is moving toward a more open economy with a huge, well-educated, and devoted population, there are a number of problems that hold India back and make doing business in India difficult. Business prosperity can be hampered by corrupt politicians, bad infrastructure, and restrictive legislation.

List Of Areas Of Risk Specific To India That a Foreign Company Should Be Aware Of

  • In India, foreign enterprises must be wary of exchange rate and interest rate risks.Many other dangers are unique to the organization, industry, geography, and competitive environment. To recognize the risks of doing business in India, it’s best to observe bi-culturally aware guidance. In India, there are about 14,000 registered trade unions.
  • Operation in a variety of political, legal, taxation, and cultural systems.
  • There has been an upsurge in commercial conflicts as the number of international firms investing in India and conducting business with Indian partners has increased.
  • Litigation, arbitration, and mediation are the most common avenues for resolving a commercial disagreement.
  • India’s economy has suffered as a result of Covid-19. In 2020, it experienced one of the most severe economic downturns on record. India’s economic growth trajectory has been thrown off by many Covid-19 waves, with the pre – corona virus growth path unlikely to recover until 2026.
  • Vulnerabilities in India’s banking industry, as well as stagnant domestic investments, are both grounds for concern.
  • In Transparency International’s (TI) Corruption Perceptions Index 2021, India was placed 86th out of 180 countries. According to TI’s Global Corruption Barometer (GCB) Asia, India has the greatest rate of bribery in Asia (39%) and the biggest number of persons who had to rely on personal connections to receive public services (46%). Although reporting corruption is necessary to stop it from spreading, the majority of individuals polled (63 percent) were afraid of retaliation if they did so. Government corruption was viewed as a major issue by a substantial percentage of people (89%).
  • Cyber attacks might affect any foreign company, regardless of its size. Thefts of money, customer data, or Intellectual property – and the resulting damage to your reputation – can have a negative impact on your bottom line. As a deterrence, we urge businesses to improve their cyber security. A number of international firms have been drawn to India by potentially lucrative business opportunities, yet there have been instances of fraud using private data shared between Foreign and Indian corporations. There have also been some specific incidents of unscrupulous Call Centers in India exploiting financial data obtained legally from their UK business partners in an unethical manner.

Macro And Micro Economic Variables That Traders Doing Business With Companies In India Need To Be Aware Of

1. Factors affecting the MACRO-environment.

  • Economic factors: Essentially, the economy’s overall climate may have an impact on two key aspects: your company’s output levels and your consumers’ decision-making processes.
  • Demographic factors: Universal demographic forces have an impact on every segment of the market. Age, education level, cultural traits, nation and area, lifestyle, and so on are some of these factors.
  • Factors technological: These variables include all of the materials and technology that a specific product requires to be manufactured, as well as the talents and abilities that are integrated into manufacturing. They’re necessary and may have a significant influence on how successfully your company runs. It all comes down to the smallest details, such as the type of maintenance trolleys you use to keep your tools and equipment in good working condition for as long as possible.
  • Physical and natural forces: Every business must consider the world and its resources as well. Forests and agricultural products are examples of renewable resources, while coal, mineral and oil are examples of a non-renewable resource.
  • Political and legal factors are at work: In different domains, the market evolves in response to the political and legal context. This implies that in order to make the best judgments, every company has to be up to speed on such global influences.

2. Factors Affecting the MICRO- Environment

  • Customers are a part of the MICRO environment: The type of client base your business draws, as well as the reasons people buy your product, will have a big impact on how you design marketing campaigns. B2C, B2B, international, local, and other types of clients are all possible.
  • Suppliers: If one of your product’s suppliers is the largest, or perhaps the only one, they will undoubtedly have a significant impact on your company’s performance.
  • Resellers: If you choose to sell your product through a third-party reseller, such as wholesalers or retailers, the success of your marketing will be heavily reliant on them. If, for example, a certain retail vendor has a good reputation, it will spread to your goods.
  • Competitors: Every company that provides the same or a comparable product as you is, logically, your market competitor. As a result, their sales and marketing strategies are extremely important to you. You must respond to a variety of questions, including how their product and pricing impact yours, and how you may utilize this to gain an advantage over them.
  • The public at large: Of course, it is in the best interests of any corporate entity to satisfy the general public. Every action you perform must be examined through their eyes as well. It’s crucial to consider how your activities influence others since their view might be the deciding factor in whether you succeed or fall from your pedestal.

How To Accurately Identify These Areas Of Risk (Resources, Strategies… Etc)

  • It is critical to identify and assess the potential causes of an issue. Internal and external risk triggers are also possible. Managers should not wait for potential issues to escalate into real issues before taking action.
  • When an issue is identified as a danger, the company’s management should move quickly to devise a plan of action in case the risk becomes a full-fledged worry.
  • Managers and top-ranking officials are not the only ones responsible for identifying hazards. Employees should be involved in detecting hazards in their areas, and management should teach them to address such risks at their level.
  • If the same hazards occur in other firms in the same sector, there is a good probability they will occur in your company as well. As a result, organisations should have a list of remedies or measures in place to mitigate the risks.
  • The same dangers might recur from time to time. By keeping track of all the risks the firm has faced from its inception, management will be able to conduct frequent reviews of past occurrences in order to spot trends that can help the organization better prepare for future hazards.

How To Manage And Mitigate The Negative Effects Of These Areas Of Risk Once They Have Been Identified

  • How To Manage And Mitigate The Negative Effects Of These Areas Of Risk Once They Have Been Identified (5 Points)
  • Money is the lifeblood of any firm and of the economy as a whole. Microeconomics and macroeconomics make up the economy. In terms of strategic decisions, both micro and macro components are crucial.
  • The essential aspects of the macro and micro economic environment must be scanned, monitored, forecasted, and assessed by strategists.
  • Working with figures and statistics is a must! Measure the susceptibility of your assets against an occurrence to classify it as a risk.
  • Any company doing business in another country should safeguard its supply chain and logistical operations from political risk.
  • Inquire about what works and what doesn’t in a specific region. We’re talking about other companies and trade associations that invest a significant amount of time and money in research.

Additionally, risk factors that should be covered are:

1. Political Stability

  •  The state of the economy and consumer confidence are both influenced by political stability. Any firm cannot thrive in a politically uncertain atmosphere. When a country has political instability, uncertainty increases because no one knows what will happen next or what safeguards or measures should be taken to minimize or lessen the risks.
  • Businesses and individuals from many countries are required to pay taxes. And the amount of tax is set by a country’s government. States with lower tax burdens provide opportunities for enterprises to expand and thrive, whereas states with higher tax burdens have the reverse effect. It also encourages multinational corporations to relocate their operations to another country, affecting the economy.
  • The government of a country controls the monetary policy, as well as the country’s revenue and expenditure, through fiscal policy. Every year, new rules, budgets, plans for aggregate demand, and supply are established to define fiscal policy. One of the most important duties for organisations is to forecast the fiscal year’s flow.
  • Countries all over the world are governed by many types of governments. Democracy, autocracy, communism, theocracy, totalitarianism, and so on. Each variety has its own set of benefits and drawbacks. Although, at the moment, the majority of countries operate under a democratic system in which everyone has the opportunity to express their views. Businesses also like this type of governance since it allows them to accomplish things on their own, which would be impossible in a totalitarian or authoritarian society.
  • Countries all over the world are governed by many types of governments. Democracy, autocracy, communism, theocracy, totalitarianism, and so on. Each variety has its own set of benefits and drawbacks. Although, at the moment, the majority of countries operate under a democratic system in which everyone has the opportunity to express their views. Every country relies heavily on imports and exports. When the government sets laws and restrictions on overseas trade, however, many businesses find it difficult to run their operations properly.

2. Foreign Exchange Risk

  • The foreign currency market is characterized by high volatility, which is influenced by changes in global policy and economic conditions.
  • When business transactions are entered in a currency other than the organization’s home currency, there is a risk of an adverse shift in currency rates between the time the transaction is entered to the time it is settled.
  • When a business organizations has a foreign subsidiary whose reporting currency differs from the parent company’s reporting currency, the subsidiary balance sheet items are converted to the parent company’s reporting currency for consolidation purposes using current accounting rules.
  • It is the risk of a change in the company’s market forecast of its operations and future cash flows as a result of a change in exchange rates.
  • When a corporation invests in a security in a currency other than its own, the rate of return is a mix of the foreign currency rate of return and the rate of exchange rate appreciation or depreciation.

3. Economic Stability

  • Mr. Shaktikanta Das, the RBI Governor, indicated at a FICCI virtual conference that the Indian economy is showing indications of stability and that the central bank will take all necessary measures to support economic development and guarantee system liquidity.
  • The governor stated at the press conference that the RBI has cut its repo rate by 115 basis points to 4% since March 2020, and that the government’s borrowing costs were kept low due to the high liquidity and low interest rate.
  • He urged firms to take advantage of the new possibilities offered by COVID-19 throughout the world, since policy repo rates have been reduced and markets have recovered.
  • Investments have been made in different sectors of the economy as the economic situation has improved.
  • “I suggest focusing on five important areas that I believe will determine stability and accelerate India’s progress in the medium term.” The first is human capital, with a focus on education and health; the second is productivity; the third is exports, which is leading to India’s participation in the global value chain; and the fourth is tourism and related productivity sectors in food processing.

3. Legal System

  • It’s time to get down to business by completing the first and most fundamental step: registering the company entity.
  • By drafting a Founders Agreement, you will be able to assess your business concept realistically.
  • You’ll need authorization to do business once you’ve set up the firm and prepared the agreement. The authorizations take the form of legal paperwork to start a business in India, which are then translated into legal licences and registrations.
  • The value of your trademark will rise in tandem with the increase of your company’s goodwill. You should register your trademark to prevent competitors from stealing it.
  • Make sure you have a solid company policy in place that you can stick to. It will keep your staff and management focused on the task at hand. Employees will be more focused as a result, and you will be able to meet your company’s growth goals on schedule.

4. Intellectual Property Protection Laws

  • The Indian government made it simpler to file trademarks online, reducing the 13-month assessment process for trademarks to eight months, with the objective of reducing it to only one month.
  • In the fifth edition of the global intellectual property index produced by the US Chamber of Commerce, India’s overall score increased just little.
  • It’s also on the table to reduce the average time it takes to respond to pending intellectual property rights applications from more than five years to 18 months.
  • Patents, copyrights, trademarks, trade secrets and market access, enforcement, and ratification of international treaties are among the six areas in which nations are graded.
  • Despite greater legal protection, copyright infringement continues to be widespread in India due to inadequate administration and enforcement methods, which fall short of many industrialized nations.

5. Banking Structure

  • Prior to the creation of the RBI, the country lacked a central bank. The Reserve Bank of India (RBI) is the country’s highest monetary and financial authority, and it oversees the country’s banking sector.
  • Commercial banks mobilize the public’s resources and make them available to big and small industrial and commercial entities, mostly for working capital needs.
  • Banks that have a paid-up capital and reserves of not less than Rs. 5 lakhs are classified as scheduled banks. Scheduled banks include all commercial banks (both Indian and international), regional rural banks, and state cooperative banks. Non-scheduled banks are those that are not listed in the RBI Act of 1934’s second schedule.
  • Regional Rural Banks (RRBs), the newest type of bank, were founded in the middle of the 1970s (with funding from individual nationalized commercial banks) offering loan and deposit services for agricultural and other productive enterprises of all types in rural regions with the objective of boosting the rural economy.
  • Cooperative banks get their name from the fact that they are governed by the state’s Cooperative Credit Societies Act. The agricultural industry, in particular, and the rural sector in general, are the primary beneficiaries of cooperative banking.

6. Tax Implications

  • The majority of nations in the world have double taxation avoidance agreements (DTAAs) with India. These agreements specify issues like as tax residence, tax computation for various types of income, and the possibility of double taxation relief, among others. It is critical for international businesses to assess how this may affect them.
  • Foreign firms that deal with their group companies in India are subject to transfer pricing restrictions (under the Income Tax Act). These rules ensure that no earnings are under-reported in either tax jurisdiction.
  • India’s tax structure is more complicated and confusing than that of most other countries. As a result, multinational firms should contact an independent international tax adviser in India before deciding on their India strategy.
  • Because of its fast growth, India has always appealed to international firms as a market. However, many international firms have put their intentions to incorporate a corporation in India on hold due to the perceived difficulties in completing the requisite paperwork.
  • There are numerous options for a foreign firm to start a business in India. A firm might register as a wholly Indian entity or as a foreign company to join the Indian market.

7. Dispute Resolution Options

  • Not only India, but the whole world’s economies are now in jeopardy as a result of the epidemic. COVID has had a different influence on everyone of our lives. People’s life may have come to a halt in some ways, but the judiciary’s job appears to be never-ending, and with that comes the challenges that courts confront in resolving prior as well as prospective difficulties owing to changing circumstances.
  • With the introduction of the Information Technology Act of 2000, e-commerce, and e-governance in India, technology has ushered in a more efficient and reasonable way of dealing with issues, lessening the strain on already overburdened courts and governments.
  • Online Dispute Resolution (ODR) is a method of resolving minor disagreements via the internet using technology and technological adaptations associated with Alternative Dispute Resolution (ADR).
  • Through video conferencing, there may or may not be any oral proceedings. This changes depending on the circumstances. Many times, a disagreement may be settled using specially developed software without the involvement of a third party. Algorithmic Dispute Resolution is the term for this.
  • The International and Domestic Arbitration Centre (IDAC) of India states that there are four fundamental phases to completing arbitration procedures, including issuing a notice to the disputed parties.

– The procedures will be carried out by arbitrators
– Procedures and hearings are carried out
– The reward will be carried out

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