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 huge social, political, economic and environmental problems aggravated by corruption as well as communal, caste and regional tensions. The Bertelsmann Foundation 2010 states that India's political system is characterised by deep-rooted patronage systems and by a bureaucracy with an interest in maintaining discretionary policies. Corruption is reported to be spreading in all sectors of Indian society and to be entrenched at every level of public administration. 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 Bertelsmann Foundation 2008 and Global Integrity 2008 note that government initiatives to curb corruption at the institutional level face an enormous implementation gap when it comes to their practical effects. Moreover Transparency International has continually cited the lack of political will to enforce and implement anti-corruption measures as the main explanation for the lack of genuine progress in the fight against corruption. Politicians are in fact the most visible perpetrators. In October 2009, the former Chief Minister of the state of Jharkhand, Madhu Koda, was charged with laundering money worth over INR 40 billion. His assets were reported to include hotels and three companies in Mumbai, property in Kolkata, a hotel in Thailand, and a coal mine in Liberia. As of writing this update, Koda was serving time in jail pending further investigations. Transparency International's 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 is now serving his second term after his party, the Congress Party, won a huge victory in the 2009 parliamentary elections. During his first term, Singh declared the fight against corruption to be a priority. However, commentators agree that the governmental campaign has not resulted in systemic changes. Instead, sporadic crackdowns on corrupt officials occur, and opposition parties regularly accuse governing parties and federal and state officials of corruption. After the 2009 elections, the Congress Party is now less dependent on allies for ruling the country and is therefore expected to leverage its majority to bring about substantial and bolder reforms than in the past. As the means to enhance economic growth and reduce poverty, commentators highlight the need for simplifying public administration, enhancing its efficiency and curbing widespread corruption within all levels of government, as a top priority for the Singh's second term in office. 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. Political parties and Members of Parliament (MPs) are required by law to disclose their sources of income and financial assets. However, according to Freedom House 2009, MPs with links to organised crime or whose election victories were dependent on unreported funding continued to serve as legislators, as do a number of MPs who face serious criminal charges.

On a positive note, the Right to Information Act 2005 has reportedly improved bureaucratic transparency by giving citizens better access to records. According to Newsweek, during the 2009 election campaign, the Congress Party actually urged Indian youth to make full use of the law and expressed the will to expand the scope of the law and to make it more effective. 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. This is confirmed by the Transparency International Global Corruption Barometer 2009, according to which, political parties, Parliament and public officials continue to be perceived as the most corrupt entities in India. Nevertheless, the public perception regarding the government's fight against corruption is fairly mixed, with 45% of the respondents considering it to be ineffective and 42% to be effective.

Business and Corruption

With its skilled and relatively low cost labour, coupled with a moderately developed infrastructure, India offers an attractive market for foreign investors. According to A.T. Kearney's FDI Confidence Index 2007, India is ranked as the second most attractive destination for foreign direct investment (FDI) in the world, with FDI continuing to represent the fastest growing component of GDP. India's economy has grown substantially over the past two decades, with a corresponding increase in GNI per capita, albeit there are great regional disparities in development, infrastructure, corruption and the ease of doing business. India is slowly increasing its world market shares of exports and has thus been included in the Transparency International's Bribe Payers Index, which ranks the world's leading exporting countries according to the propensity of their companies to bribe abroad. The 2008 edition of the index shows a slight improvement, but Indian companies are still among those most likely to resort to bribery when operating in foreign markets.

According to the World Bank & IFC Enterprise Surveys 2006, companies cite excessive regulation and high levels of corruption as a major constraint to doing business in India. Companies surveyed by the World Economic Forum Global Competitiveness Report 2009-2010 confirm that corruption is a continuing obstacle to private sector development, ranking corruption as the third most problematic factor for doing business in India, after inadequate supply of infrastructure and inefficient government bureaucracy. According to some foreign business representatives in India, corruption risks stem from a lack of transparency in the rules of governance, extremely cumbersome official procedures and excessive and unregulated discretionary power in the hands of politicians and bureaucrats. For example, in a 2008 International Herald Tribune interview, a businessman reported that he was required to obtain nearly two dozen licences related to, among others, health and safety, labour laws and pollution. Each licence reportedly costs a few hundred INR, takes a year to renew and requires an INR 10,000 bribe. The businessman further reported that 23 departments have the power to shut down his company, and that maintaining good relations with public officials is crucial for business operations.

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 and regulation and corruption vary widely from area to area (see also this profile's special page on regional differences in corruption and the regulatory environment). Although clusters have been developed, such as in the New Delhi suburb of Gurgaon, where the business environment is relatively free from corruption, there is little doubt that corruption affects the business climate throughout India. This is exemplified by responses to the World Bank & IFC Enterprise Surveys 2006, which reveal that more than 47% of companies in India expect to pay bribes 'to get things done'. Corruption in the form of bribery, kickbacks from procurement deals, and tax evasion is widespread in the private sector. 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 4th 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. Following this disclosure, in 2007 the World Bank banned three IT companies, Satyam Computer services for eight years and Wipro Technologies and Megasoft Consultants for four years from its corporate procurement programme. 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 regulation. 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. Further, there have been scams relating to initial public offering (IPO) of shares whereby some large companies and brokers maintained fake bank accounts and applied for shares meant for small investors, in a move to capture the shares meant for the latter. 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 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 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 2009-2010, 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 Business section and the How do I? section of the National Portal of India are 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 2010, setting up a company in India requires an average of 13 administrative steps, which may take as long as 30 days at a cost of 66% 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. A report by Reuters reveals that investors face resistance in states over acquisition of farming and forest land. A case in point is the Tata Motors Nano project, which pulled out of the West Bengal state after protests by farmers unhappy with compensation over their land. The World Bank & IFC Investment Climate Assessment 2004 points to unclear land ownership, widespread institutional ownership, inflexible land use, unclear property rights and high transaction costs as constraints that create high land prices for companies. The regulatory burden and lack of flexibility means that relative land costs in New Delhi are 80% higher than those in Tokyo, Singapore, Jakarta and Seoul. Companies should also note that dispute settlement in India is time-consuming due to the massively backlogged and understaffed Indian courts. According to the Transparency International Global Corruption Report 2007, these delays are coupled with the cumbersome bureaucracy in the judicial system and fuel the use of bribes in relation to dispute settlement. 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 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.