Doing Business in IndiaLearning to exploit the untapped potential

“Anything you say about India, the opposite is also true.” - Interview with Shashi Tharoor, former UN Under Secretary General, Tufts Magazine, cited in Kumar & Sethi (2005) Doing business in India... read more

India is a country that has begun to capture the imagination of the international business community. The changing perceptions are a product of the economic reforms that began in India in 1991 and have continued apace. Prior to 1991, India was a closed market with severe restrictions on foreign direct investment, a stifling industrial policy regime and heightened restrictions on international trade in the form of tariffs and quotas. All of this has changed since 1991, and India is now a very different place. Although the country has begun to shake off its past, India remains a country that has been deeply molded by the legacy of Hinduism, British imperialism, and the socialistic era policies pursued at the onset of independence in 1947. The new India and the old India coexist, perhaps not always easily, and this may well explain Tharoor’s observation that India is often hard to characterize in a succinct and clear cut fashion.

The objective of this series is to acquaint policy makers, business people, academics and students with India. This is not an easy country to either characterize or understand but it is a country whose economic clout is increasing by the day. Foreign investors are flocking to the country, Indian companies are developing global ambitions, and India’s political power on the world stage is on the rise. At the same time, however, democratic India is home to a third of the world’s poor, is a stratified caste based society, and exhibits a major rural-urban divide. It is also a society where corruption is endemic, and policy implementation relatively poor. And yet, in spite of all of these constraints, many Indian firms, and most notably the software firms, have succeeded in expanding rapidly and developing a global image for themselves.

Understanding India requires a deep appreciation of the country’s political, economic and cultural environment. An understanding of the Indian environment is essential if one wishes to appreciate the complexities and many contradictions inherent in India. India is a country that has a distinctive cultural tradition embodied in Hinduism, a history of being ruled by outsiders, a socialistic legacy, an ongoing dispute with Pakistan over Kashmir, and the cold war legacy when India was closely allied with the Soviet Union and Pakistan with the United States. This understanding is absolutely vital if one wishes to understand the challenges faced by foreign investors in the Indian market and wishes to get an understanding of the challenges faced by Indian companies as they venture overseas.

Politically, India has been a democracy since inception. The Indian National Congress (INC) led by Jawaharlal Nehru, was the dominant player in the Indian political scene for many decades after independence. Following Nehru’s demise and a brief interlude thereafter, Nehru’s daughter, Indira Gandhi became India’s prime minister. Adopting a populist stance, she introduced a range of policy measures that imposed new restrictions on foreign investors. Coca-Cola and IBM left the country when the draconian Foreign Exchange Regulations act was introduced by the government which forced foreign investors to dilute their equity holdings to 40%. Following a brief time out of power, Indira Gandhi rose once again to become India’s Prime Minister in the 1980s. Following her assassination, her son Rajiv Gandhi rose to power, and just like his mother was assassinated in 1991. The dominance of the INC party gradually eroded over time and other parties such as the Bharatiya Janata Party became dominant, albeit for a restricted period of time. Currently the INC is in power, but this is a different INC from the old days in that it must rely on coalition partners to maintain its majority. The reliance on coalitions, as opposed to dominance of any one single party, is the contemporary trend in Indian politics. This no doubt imposes constraints on any government to implement policies in a manner that it would like to.

India’s economic structure has gradually evolved over several decades. At independence India was primarily an agricultural country and it is now an economy where services play an increasingly important role. The manufacturing sector has been slow to develop, although in recent years it is has shown increased resurgence. At the onset of independence Nehru inspired by the Soviet model pursued a policy of import substitution industrialization. The idea was to make India self sufficient and not to be overly dependent on imports. India pursued a policy of heavy industrialization and public sector units were established in industries such as steel. Imports were discouraged and this was accompanied by export pessimism. An explicit policy of industrial licensing was established which required manufacturers to obtain permission from the government if they wanted to expand their output. Foreign exchange regulations were put in place which necessitated that firms obtain permission from the government to import products. Bureaucratic regulations were present almost everywhere, leading commentators to talk about the existence of a “license-permit” raj. This may have played a role in the development of corrupt practices that have become so endemic in the contemporary Indian environment.

More than 80% of India’s population is Hindu and Hinduism has therefore shaped the cultural trajectory of the country. A key belief of Hinduism revolves around the idea that the deepest level of reality is non-material. This reality is often referred to as the Brahman and a key implication is that individuals must strive to attain this reality. If the deepest level of reality is non-material it is perhaps not hard to understand why a singular focus on maximizing material wealth may not be the key to individual happiness. A related doctrine is the doctrine of karma which suggests that individuals who perform good deeds will receive the appropriate reward, whereas individuals who behave inappropriately will be penalized. When coupled with the doctrine of transmigration of the soul, it suggests that individuals with a good karma may be reborn into a higher caste. The Caste system is an integral aspect of Indian societal culture. Brahmans are at the apex of the hierarchy, they are the priests or the knowledge brokers in Indian society. Ksatriyas are the warriors who governed the society while defending it from external threats. Vaishyas are the traders who create economic value while Sudras are the workers.

The proposed series on ‘Doing Business in India’ will begin by providing an overview of contemporary India. This overview will cover Indian politics, culture, and the evolving Indian economy. We will then look at the challenges confronting foreign investors as they seek to do business in India. There are many challenges that foreign investors are confronted with. Some of the prominent challenges are negotiating business contracts, managing outsourcing partnerships, managing the Indian workforce and dealing with the Indian regulatory authorities. The series will also cover the development of the Indian IT industry as it is the rapid growth in the Indian software sector that has propelled India onto the world stage. We also explore the nature of the evolving Indian firm and the challenges that they face in becoming global players.