India Risk Review 2017

Overall Business Climate in India in 2017

India has emerged as one of the fastest growing major economies in the world. The country has stepped up its efforts to improve the overall business climate and has kicked off macro reforms in monetary policies and its regulatory structure. The government has also taken steps to improve the ease of doing business. According to the World Bank’s annual ease of doing business report published in 2016, India has implemented a set of reforms leading to considerable improvement in the business environment. Looking at key macro indicators of – getting electricity, paying taxes, trading across borders and enforcing contracts – the country has made tangible reforms. India is placed in the top 50 global economies on three of the ten pointers – getting credit, protecting minority investors and getting electricity. However, due to the overlap of jurisdictions, excessive regulations and bureaucratic impediments, India will continue to be a comparatively difficult country for rapid business growth in the foreseeable future. On the plus side, Indian states are on a reform and fast growth trajectory, creating favorable conditions for investments and a benign supportive regulatory framework. In fact, some states will show consistent double-digit growth, giving an overall impetus to the Indian economy besides creating a healthy and competitive investment climate. The rise of states as a catalyst for growth would be the highlight of the economic landscape of 2017.

With a desire to make the recent re-monetization experiment a success, the government can be expected to take a series of bold steps to stimulate growth and consumer confidence. This could translate into a softer tax regime, besides easier access to capital and hitherto closed markets. The effect of de-globalization, the slowdown in world trade and creeping protectionism, coupled with ultra-nationalism, could affect the outsourcing and IT sector in the medium term. However, since exports are not the key driver of the Indian economy, the effects would be limited in scope.

Top 5 risks for businesses in 2017

Public protests/ social unrest

Due to the diverse demographic landscape, dissent focused around caste and religion and multiple socio-economic differentiators is deeply embedded in Indian society. The Jat agitation in several parts of Haryana in February 2016 resulted in an estimated loss of around `20,000-30,000 crore to the state coffers. Several parts of Karnataka including the state capital Bengaluru witnessed disruptive demonstrations in August-September 2016 due to the release of water from the Cauvery River to neighboring Tamil Nadu state. The unrest entailed blockades of key highways and roads, suspension of state railway and Bengaluru metro services and widespread vandalism. Hardline regional groups could potentially trigger unrest since the resolution to some of these disputes remains largely unresolved. Furthermore, the political landscape has become polarized and more strident in the past year. The coming state elections and the opposition of many parties to re-monetization are likely to exacerbate matters and create fissures in the social polity of the nation, affecting business growth. Economic growth unless linked to job growth is not going to appease the restless youth of the country. Finding productive employment for the millions of young people entering the job market will be one of the greatest challenges of 2017 and beyond.

Cyber security

With the emphasis on digital India, e-commerce, and mobile payments, especially after demonetization, cyber security has gained further importance. With business operations becoming inter-linked through increasing digitization, challenges emanating from cyber security are bound to manifest in the coming years. Cyber security affects all organizations, ranging from start-ups to multinationals. Previously developed nations were the prime targets of cyber-attacks. However, the trend has changed, and firms based in India have also been increasingly targeted and are at par with global companies in terms of being impacted by cyber-attacks. In one of the significant attacks in 2016, around 320 thousand debit cards of various Indian banks were compromised.

In light of the recent cyber attacks, the government is in the process of setting up a national cyber security structure which will designate agencies to monitor the threats and strengthen India’s cyber ecosystem. However, going forward in 2017, India requires reformed cybersecurity laws that would make it easy to protect critical infrastructure, and empower agencies to manage incidents effectively. Thus cyber security would need far greater emphasis in 2017 and unless addressed would constitute a business risk.

Bribery and corruption

Despite the central government efforts to bring transparency and limit government interference, bribery and corruption continue to pose a serious risk to the business climate. Corruption in India has raised transaction costs, as well as the cost of operations for businesses, mainly in the real estate, defense, and infrastructure enterprises. Companies are likely to face red tape, petty corruption, and bribery when dealing with public services. Some of the other sectors, which will remain impacted by corruption, include metal and mining, power and utilities sector. Overall due to expected regulations on reduced usage of cash, there would be a marginal improvement in the overall corruption index.

Natural disasters

Major metropolitan cities continue to remain under-prepared to handle severe flooding resulting from the annual monsoons, which usually run from June-September. Last year, many parts of Mumbai, Delhi and Gurgaon, Hyderabad, and Kolkata were submerged due to waterlogging, resulting in severe disruption to businesses. The city administrations need to reform and modernize their approach towards urban governance. The usual aspects of water administration, drainage and sewage systems, and public transport facilities need serious revamp, especially to qualify for the ‘Smart Cities’ tag. It is therefore imperative for the firms to strengthen their existing business continuity plans to overcome the challenges likely to present themselves during the monsoon season in 2017. Furthermore, there would be a need to further strengthen processes related to fire and natural disasters.

Maoist/ Naxal insurgency

Although several successful security operations in 2016 have put the Maoist insurgents in a defensive mode, the Naxals have conducted some counter-offensive attacks targeting security forces as well as civilians. There have been reports of growing Maoist presence in the southern states of Kerala, Karnataka and Tamil Nadu. In a major Maoist-led strike, the insurgents in December torched around 70 heavy vehicles including three construction-related equipment at an iron mine in Surjagad, in Maharashtra’s Gadchiroli district. The incident is considered to be one of the significant attacks against a business enterprise in Maoist-affected areas.

2016 witnessed a decline in Maoist-related violence as compared to the previous year, due to better deployment of security personnel in the affected regions, loss of cadres and leaders; combined with protracted development measures, and empowering of local communities to mitigate the threat of Naxal violence. Nonetheless, it is likely that the Maoist threat will remain as one of the biggest security threat to businesses operating in the affected regions in 2017.

Top 5 enablers for businesses in 2017

Demonetization

The demonetization of high-value Indian currency notes in November 2016 was planned as big ticket reform. The move has brought into the banking system a lot of undisclosed cash. The move has facilitated the increased usage of digital payments and is hoped to reduce the reliance on cash transactions. India plans to use the unique identification system as the backbone of the cashless transaction in the future. The move though path-breaking, is controversial, having caused a serious dent in the low income rural and agricultural economy. The jury is still out on its overall impact but appears to have had a positive impact. Apart from giving a boost to digitization, the move has the potential for greater financial transparency, higher tax collections and consequent lowering of the fiscal deficit.

Goods and Services Tax

Goods and Services Tax (GST) is a planned system of indirect taxation aimed at making India one unified common market. Once rolled out, the industry and business in the country will benefit immensely from the progressive taxation regime. The principal benefit to the businesses across the sectors will be uniformity of tax rates and structures across the country, thus increasing and easing the ease of doing business. The industry in the country is ready to accept the new tax regime, as it will terminate some archaic tax laws; and is considered to be one of the game changers for the Indian economy. GST roll out in 2017 is expected to give up to 1 to 2% increase in GDP in a few years.

Easier availability of capital

With NPAs of banks being brought under some control, capital availability is likely to be a big catalyst for growth in 2017. Lending to the medium and small scale sector is poised for a huge growth at affordable terms. Easier housing loans would also give a boost to the infrastructure sector. Re-monetization would also make additional capital available for the agricultural and rural sector. With states rolling out the red carpet for investors, capital would be more readily available in 2017 but would be spread out across the industry and not be restricted to few favored corporate entities as hitherto.

More benign compliance and tax regime

Given the current government’s desire to generate a level playing field and give impetus to ‘Make in India,’ a more business friendly compliance and moderate tax regime can be forecast for 2017.

India has just signed an avoidance of double taxation protocol with Singapore on similar lines that it had signed with Mauritius. This is a significant step and would pave the way for a just tax regime, triggering genuine investment and tie-ups. A simpler and lower corporate tax and capital gains rules would be a big business enabler for 2017.

Mobile and Internet penetration

2016 witnessed a proliferation of the usage of 4G smartphones in India. With tariff rates plummeting steeply, the usage of a smartphone with versatile apps will grow exponentially. The enhanced smartphone-based connectivity and data reach will provide for a huge opportunity for data stacks to be optimized and connect seamlessly with consumers. Internet penetration and multiple payment gateways would greatly help business to grow and attract consumers.

Growing middle class

A Huge growth in the middle-class numbers would stimulate demand and consumer spending. With the rise in incomes consequent to the 7th Pay Commission, coupled with government spending on infrastructure and Smart Cities; there would be multiple growth opportunities in the retail and manufacturing sectors. Renewable energy, agriculture, rural growth would also create and be a catalyst for demand and business confidence. With numerous airports and additional roads planned for tier two cities, railways and freight corridors coming up, cost-efficient movement of goods would push the growth of capital goods besides having a trickle down effect of infrastructure spend.

Sectors with potential for growth

Infrastructure

The Indian government has announced a massive $376.53 billion investment in infrastructure over a period of three years, which entails $120.49 billion for developing 27 industrial clusters and an additional $75.30 billion for road, railway, and port connectivity ventures. In 2016, India climbed 19 places in World Bank’s Logistics Performance Index (LPI), to an impressive 35th position amongst 160 countries. The government is further planning to enhance regional connectivity by setting up 50 new airports in the next three years; at least 10 would be operational in 2017. There remains a huge gap between potential and current demand in this sector, and the prospects and possibilities of growth of infrastructure market are huge.

Power sector

Consistent and abundant power is one of the most critical components for decisive economic growth. India’s power sector is believed to be one of the most diversified ones – sources vary from coal, natural gas, oil, nuclear power to non-conventional sources such as the wind, solar, agricultural and domestic waste. The sector is witnessing a transformation and has redefined the industry outlook. From the investment scenario, the industry has attracted $10.48 billion in Foreign Direct Investment (FDI) from 2000-2016. Furthermore, the government has identified power sector as a medium to promote sustained industrial growth. This sector is poised for further growth in 2017, as it carries the potential to attract over $220 billion in next 4-5 years.

Defense sector

The Indian defense sector is likely to carry forward the growth momentum in 2017, that it witnessed in the previous years. India in 2016 became the fourth largest spender in defense.  The government’s special drive to defense manufacturing, in sync with the ‘Make in India’ campaign, has attracted the attention of major global defense firms. The government has liberalized the sector by increasing the FDI cap in defense to 49%. The defense market is estimated to become $620 billion by 2022. Furthermore, around $130 billion worth of contracts is projected to be awarded locally. Major industrial organizations such as the Tatas, the Mahindras, the Hero group, Anil Ambani’s ADAG, Mukesh Ambani’s Reliance Industries, Bharat Forge and the Hinduja group have already invested capital in this sector.


“The past year has been significant from the geostrategic as well as business perspective. The unraveling of the SAARC due to Pakistan’s continued dalliance with terrorism and the downtrend in Sino-Indian relations due to China’s stance on the NSG has changed the power dynamics of South Asia. This trend is likely to continue in 2017; with India taking firmer steps in its look East policy and closer integration with ASEAN and Pacific Rim countries. GST bill and ‘Make in India’ policies will give an impetus to the economy. With the government keen to make a success of the demonetization experiment, it will make efforts to stimulate growth and further improve the ‘ease of doing business’ strategy. Many resurgent states will go all out to woo FDI and enable business partnerships, by streamlining and improving policy guidelines. With elections in many states, it will be a defining year of steady growth but a slightly fragile security landscape.”

Lt Gen Sudhir Sharma

 

Lt Gen Sudhir Sharma

PVSM, AVSM, YSM, VSM (Retd.), Chairman, MitKat Advisory Services


 

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