India Country Profile
General Information
Political Climate
India has opened its economy after years of virtual closure and enjoys a relatively stable political climate and strong economic growth. Significant governance challenges remain, however, as India continues to struggle with substantial social, political, economic and environmental problems aggravated by corruption as well as communal, caste and regional tensions. India's political system is characterised by deep-rooted patronage systems and by a bureaucracy with an interest in maintaining discretionary policies, as assessed by the Bertelsmann Foundation 2010. Corruption is reported to be spreading in all sectors of Indian society and to be entrenched at every level of public administration. As a response, the country has established a series of constitutional, legal and institutional provisions aimed at combating corruption.
However, while there is no shortage of anti-corruption bodies and legislation, both Global Integrity 2009 and the Bertelsmann Foundation 2008 note that government initiatives to curb corruption at the institutional level face an enormous implementation gap when it comes to their practical effects. Politicians and public officials are in fact the most visible perpetrators. According to a 2010 news article by The Wall Street Journal, public officials are frequently accused of bribery, falsifying government documents and misusing government funds. In recent years, corruption scandals in India have come into the international spotlight. One such example is the 2G telecoms scandal in 2008, which may have cost the government USD 39 billion in lost revenues (See 'Licences, Infrastructure and Public Utilities' in the Corruption Levels section for more information on this). In October 2010, two senior officials were arrested in connection with a corruption scandal linked to the Commonwealth Games. According to a January 2011 article by AFP, up to USD 1.8 billion of the money earmarked for the Games was reportedly misappropriated. Transparency International Global Corruption Report 2008 states that political corruption is not confined to monetary transactions, but extends to making promises to secure votes, helping colleagues by awarding them with positions of authority, and manipulating the law to help interested parties. Prime Minister Manmohan Singh declared the fight against corruption to be a priority during his first term as prime minister; however, a series of corruption scandals have shown that his anti-corruption efforts have not resulted in systemic changes. Politicians and civil servants are known for accepting bribes or engaging in other corrupt behaviour, but investigations are rare, and few have been convicted of corruption. In April 2011, a social activist, Anna Hazare began his hunger strike demanding a stronger Lokpal Bill (Ombudsman Bill). The strike caused thousands of supporters to join Hazare and sparked protests across the country. After months of protests as well as debates on the content of the bill, on 4 August 2011, the government’s version of the Lokpal Bill was tabled in the Parliament. However, Hazare and other activists objected to the draft on the grounds that the Ombudsman should also be able to investigate the prime minister and the judges. On 27 August 2011, the government finally agreed to the three key conditions set by Hazare, which were the creation of a Citizen's charter, inclusion of lower bureaucracy under the Lokpal through an appropriate mechanism and the creation of Lokayuktas (Ombudsmen at state level). As of October 2011, it remains unknown whether and when the Lokpal Bill will get approved and passed into law.
On a positive note, the Right to Information Act 2005 has reportedly improved bureaucratic transparency by giving citizens better access to public records. The Supreme Court has also been asserting itself as an upholder of the constitution and has taken significant steps in the fight against corruption, such as challenging a legislative immunity provision and demonstrating its independence by ordering retrials or reviews of previously closed cases deemed to have been politically influenced and biased. However, despite such positive steps, bribery thrives among high-level politicians and bureaucrats, and the majority of citizens agree that the use of bribes cannot be avoided when one interacts with the public administration. According to the BRIBEline 2009, approximately one-third of reported demands for bribes from citizens between 2007 and 2008 were from national-level government officials. This is confirmed by the Transparency International Global Corruption Barometer 2010, according to which, political parties and the Parliament continue to be perceived among the most corrupt entities in India. Moreover, the public perception regarding the government's fight against corruption is quite revealing, with 44% of the respondents considering it to be ineffective and only 25% to be effective.
Business and Corruption
India continues to have a strong economic growth rate with an annual GDP growth of 8-9%, and it has a relatively strong financial position after the global financial crisis has made it a preferred destination for foreign investment. According to the US Department of State 2011, the country remains among the most attractive locations for foreign direct investment (FDI). Nevertheless, local investment conditions may vary from state to state and, in some cases, within a state, due to varying levels of corruption and quality of government operations. Recent changes in FDI policy have tended towards greater liberalisation, while industrial policy reforms have substantially reduced industrial licensing requirements.
According to a press release by Value Notes, in January 2011, JPMorgan Asset Management India announced its findings of the Investment Confidence Index (ICI) in India. According to the report, corruption has now emerged as the new confidence killer among retail investors, corporate investors and financial advisors, ranking as the second most negative economic indicator after inflation. According to KPMG India Fraud Survey Report 2010, 75% of corporate respondents state that corporate fraud is increasing in India, while 81% of respondents perceive financial statement fraud as a major problem. The same survey also indicates that 38% of respondents perceive that bribery is an integral feature of industry practices, and 37% state that most bribes are paid to obtain routine administrative approvals from the Government. In March 2011, KPMG released another survey on bribery and corruption in India, which shows that the responding business executives perceive real estate and construction as the most corrupt sector in India, followed by the telecom sector. The survey also shows that 68% of respondents agree that in many instances corruption stems from the private sector. All respondents in the survey agree that corruption distorts the playing field and tends to attract companies with lesser capability to execute projects, while 99% of respondents agree that corruption creates inefficiency and hence increases costs. Furthermore, business executives surveyed by the World Economic Forum Global Competitiveness Report 2011-2012 confirm that corruption is a continuing obstacle to private sector development, ranking corruption among the most problematic factors for doing business in India. This perception is also highlighted by the US Department of State 2010, according to which, foreign companies report that corruption is among the obstacles to foreign direct investment, while local businessmen state that red tape and wide-ranging administrative discretion serve as a pretext to extort money. India ranks 19th out of 28 economies in the Transparency International Bribe Payers Index 2011, indicating that the perceived likelihood of Indian companies engage in bribery abroad is relatively high.
Companies experience corruption in every sector of the Indian economy, but studies show that the experience and perception differs depending on where they operate. India has a decentralised federal government system where regulatory requirements and corruption vary widely from area to area (see this profile's special page on regional differences in corruption and the regulatory environment). According to Transparency International Global Corruption Barometer 2010, a majority of the surveyed households perceive the business and private sector as corrupt. The government tried to bring these malpractices to an end by making it compulsory for all companies to have their books and accounts audited annually, and for external auditors to report fraud committed by the companies they audit. Notwithstanding the government efforts, a huge scandal by the end of 2008 involving India's fourth largest IT company, Satyam Computers, has highlighted serious flaws in this system, which allowed the company to 'cook the books' for USD 1.5 billion, as reported by a 2009 news article by IPS. In addition, Transparency International's Global Corruption Report 2009 states that there have been cases of stock market fraud by brokers in collusion with corporations that aim to cheat investors and circumvent regulations. The Harshad Mehta securities fraud and the Ketan Mehta scam are two well-known scams in this regard. In both instances, brokers pushed up the prices of selected shares through artificial trade to attract retail investors and then suddenly withdrew from the trade, causing huge losses to the investors. In order to mitigate the risks of corruption when operating in India, companies are recommended to develop, implement and strengthen integrity systems and conduct extensive due diligence.
Regulatory Environment
India's regulatory environment has been significantly simplified in most sectors and, according to the Bertelsmann Foundation 2010, its investment regime is now among the most liberal in Asia. However, the efforts to further liberalise the economy have reportedly been limited by the pressures of coalition politics. The United Progressive Alliance (UPA) government has struggled to implement some of its economic policies because of tensions among its distinct coalition partners on issues such as the privatisation of public sector assets and labour law reform. Privatisation has significantly slowed since the new government took office in 2004 (see the Ministry of Finance Department of Disinvestment for more information on privatisation tenders). The Bertelsmann Foundation 2010 reports that coalition politics have led to a weakened federal control of states, and several sources indicate that the resulting variance in regional regulatory environments corresponds with varying levels and types of corruption. For more information concerning these regional variations, see this profile's special page on regional differences in corruption and the regulatory environment. According to the World Economic Forum Global Competitiveness Report 2011-2012, the regulatory burden imposed on companies operating in India remains cumbersome, costly and time-consuming. However, major reforms have improved the regulatory environment, such as the computerisation of certain business-relevant administrative procedures. The National Portal includes useful tools for companies seeking information on market entry and necessary licences and permits. Companies should also consult the website of the Investment and Trade Promotion Division of the Ministry of External Affairs for useful information and contacts for foreign investors.
Private local and foreign companies are allowed in nearly every sector of the economy. There are no requirements to employ Indian nationals and restrictions on employing foreign technicians and managers have been removed. However, the economy is still constrained by complex rules and a bureaucracy with broad discretionary powers. Business clearance by the authorities is therefore time-consuming and costly. According to the World Bank & IFC Doing Business 2012, setting up a company in India requires an average of 12 administrative steps, which may take as long as 29 days at a cost of 46.8% of GNI per capita. The World Bank & IFC Enterprise Surveys 2006 reports that senior management can expect to spend close to 7% of its time dealing with the requirements of government regulation.
According to the Bertelsmann Foundation 2010, property rights are adequately defined, although the acquisition of new land for use by companies is reportedly very difficult, costly and heavily contested politically. Companies should also note that dispute settlement in India is time-consuming due to the massively backlogged and understaffed courts. India is ranked 132nd out of 183 countries by Doing Business 2012, with respect to the ease and cost of enforcing contracts. Moreover, foreign investors often complain about a lack of sanctity of contracts, as reported by the US Department of State 2011. According to the Transparency International Global Corruption Report 2007, judicial delays are coupled with the cumbersome bureaucracy in the judicial system and fuel the use of bribes in relation to dispute settlement. In addition, business executives surveyed in the World Economic Forum Global Competitiveness Report 2011-2012 report that the judiciary is not fully independent from political influences of members of government, citizens or companies. In an attempt to speed up the settlement of commercial disputes, the Government of India has set up the International Centre for Alternative Dispute Resolution (ICADR) as an autonomous organisation under the Ministry of Law and Justice and Company Affairs. In an effort to unify its adjudication of disputes over commercial contracts with the rest of the world, India enacted the Arbitration and Conciliation Act of 1996, based on the United Nations Commission on International Trade Law (UNCITRAL). India is the only country in the South Asian region that is not a member of the International Centre for the Settlement of Investment Disputes (ICSID), but is a member of the New York Convention of 1958. Companies are recommended to include provisions for international arbitration in their contracts. Access the Lexadin World Law Guide for a collection of legislation in India.
