Prepared by Mitkat Advisory Services
An introduction by Maroof Raza
To ensure that India’s economy maintains its upward growth trajectory and if we are to eventually have 100 smart cities, the country needs a safe environment for its citizens and businesses to prosper. And for that we need to devote much greater attention to safety within our country and the terror trends in India’s neighbourhood. This also requires bigger investment and clearly enunciated responsibilities for the safety of our infrastructurecities, energy hubs, railways, coastal areas – and for cyber security, specially by businesses. Indian companies lost around USD 4 billion due to cyber attacks in 2013. Equally important is India’s vulnerability- despite the official assurances- to attacks by Pakistan based terror groups and from those within.
However, India’s rise still inspires investors abroad, and with the US now clearly putting its bet on India, following President Obama’s second visit to India, it is now up to India’s establishment to deliver. For that, India’s officialdom has to rise to the challenges of the 21st century, and amend the archaic laws and rules of business. The Indian Risk Review 2015, highlights these challenges and the way forward.
“India will be a fulcrum of twentyfirst- century order: an indispensable element, based on its geography, resources, and tradition of sophisticated leadership, in the strategic and ideological evolution of the regions and the concepts of order at whose intersection it stands.” – Henry Kissinger (in his latest book ‘World Order’)
For India, 2014 unfolded in two distinct parts. The first, relatively pessimistic, leading up to the parliamentary elections, had the economy growing at around 4% with little hope, policies or new investments. Beginning end-May, with a new probusiness government in place, India’s economic environment has taken a decisive turn for the good during the second half of 2014.
India votes for change
India voted, for the first time in 30 years, for a government with a single-party majority. After a free and fair, long and peaceful election, in a triumph of democracy, Narendra Modi, the threetime charismatic Chief Minister of Gujarat took oath on 26th May 2014, as the Prime Minister of India, in a ceremony attended by nearly all Heads of State of SAARC. High profile visits to Japan, the US and Australia, and subsequent victories in many state assembly elections for his party have only consolidated Modi’s authority and global stature.
The global perception of India has changed dramatically over the last seven months. There is renewed optimism. In terms of policy direction, the government has sent out positive signals. Modi has promised to improve governance, clean India, build 100 smart cities, connect villages through broadband, improve financial inclusion, create jobs and employment, and revitalise economy and infrastructure. He has invited Indians abroad and foreign companies to invest in railways, roads, ports, aviation, defence and digital infrastructure.
Mr Modi has gotten off to a brilliant start in foreign policy, re-establishing India as a significant player in international affairs. Such is India’s position in regional geopolitics that countries ranging from Japan to Australia, Vietnam to the United States expect New Delhi to take their side in their disputes with China. India’s foreign service is understaffed, which means that there is a limit to which it can follow through on Mr Modi’s energetic initiatives. If diplomatic capacity does not catch up, the gap between the prime minister’s promise and the foreign service’s delivery can diminish India’s credibility in the international arena. Domestic politics can constrain Mr Modi’s ability to deliver his part of international deals, much like they did his predecessor. By courting the Indian diaspora, Mr Modi cannot avoid stepping into their politics. This is a double-edged weapon, especially where there is an expectation that New Delhi will intervene on their behalf in local political or ethnic disputes.
Mr Modi has gotten off to a brilliant start in foreign policy, re-establishing India as a significant player in international affairs. Such is India’s position in regional geopolitics that countries ranging from Japan to Australia, Vietnam to the United States expect New Delhi to take their side in their disputes with China. India’s foreign service is understaffed, which means that there is a limit to which it can follow through on Mr Modi’s energetic initiatives. If diplomatic capacity does not catch up, the gap between the prime minister’s promise and the foreign service’s delivery can diminish India’s credibility in the international arena. Domestic politics can constrain Mr Modi’s ability to deliver his part of international deals, much like they did his predecessor. By courting the Indian diaspora, Mr Modi cannot avoid stepping into their politics. This is a double-edged weapon, especially where there is an expectation that New Delhi will intervene on their behalf in local political or ethnic disputes.
After the novelty and the shine wears off a promising new government, it is the economic indicators that will matter; so growth is a foreign policy imperative. The government has deregulated petrol and diesel pricing and opened up crucial sectors like defence and insurance. Defence (in which FDI has been increased to 49%) has seen a flurry of activities. “Digital India” – an ambitious plan to connect each of India’s villages with broadband within a decade, will complement an equally ambitious “Make in India”. The real estate sector has been liberalised. Environmental clearances, which had held back large number of projects, have been speeded up. The mess of preferential allotment of coal blocks is being cleared up. Government disinvestment has kicked off. A new “Skills and Entrepreneurship” ministry has been created. The Government has promised a stable, fair and transparent tax regime – with no retrospective levies. Discretion is giving way to fair competition.
Globally, 2015 will be a rough year. Growth in the US will be tempered by concerns about the US Federal Reserve increasing interest rates and the consequent impact on global liquidity and risk aversion. The Euro-zone continues to witness zero growth and deflation. Commodity prices have moved down significantly. This will impact major economies like Russia, Middle East, Brazil and South Africa. India, a net importer of commodities, would be a big beneficiary of this new cycle of global growth. This coupled with our own cyclical upturn and a government working overtime to energise its bureaucracy could propel the annual growth to over 6%.
A 100 million people have recently been brought into the formal banking sector under “Jan Dhan Yojna”. The consolidated Goods and Services Tax (GST) is likely to be effective soon, which will reduce the inequities in the taxation structure to a great extent. Empowering states and fair revenue sharing arrangements are on the agenda of the current government, led by a PM who has experienced the difficulties of states for over a decade as the CM of one of India’s most progressive states. The PM wants to simplify and digitise governance – increase transparency and accountability and take discretion out of decision-making.
Fundamental Challenges remain Despite increased business confidence and an overall sense of optimism, fundamental challenges abound.
External and internal security concerns remain. Geo-political tensions in Russia-Ukraine and instability in the Middle East could lead to oil supply disruptions (which has not so far happened). The neighbourhood continues to be turbulent. “Mainstreaming of terrorism” in Pakistan, Afghanistan, Iraq and Syria pose serious challenges. The five richest jihadist groups have an estimated wealth of US$ 2.6 billion, with ISIS (which is in physical control of large swathes of territory in Syria and Iraq), being the richest, and running a sophisticated multi-billion dollar business through oil trade, kidnap and ransom, wealth from captured territories, human trafficking, sale of historical artefacts etc.
There have been skirmishes on India’s Western border and failed attempts by Pakistan to derail the election process by sending in terrorists. Four coordinated attacks in Kashmir days before PM Modi’s visit have had clear, unambiguous links to Pakistan.
The rise of ISIS presents serious internal challenges as well. The arrest of a youth, working with an Indian MNC, who operated a Twitter handle sympathetic to ISIS, highlights the enormity of challenges posed by radicalisation of youth on social media. Some ideologically and religiously motivated comments, with links to the ruling party, have been unfortunate. Sceptics worry that under an increasingly assertive regime, the space for dissent and opposition could shrink. Maoists still retain the ability to cause serious casualties on security forces and large swathes of area continue to be outside the control of states.
The rise in digital infrastructure has been accompanied by new and more complex cyber security threats. Indian companies lost around USD 4 billion due to cyber attacks in 2013; the amount is set for a 30 per cent jump in 2014. Nigerian fraud and theft of information remain rampant. There also appears to be a ready market where hackers can sell the information. Larger companies, due to their larger assets, are more attractive targets. However, in some cases, smaller group companies have been targeted to get access to larger group companies or to steal confidential information of ‘wealthy clients’.
Despite bold pronouncements and the slogan of ‘make in India’, manufacturing shows little signs of revival. Unemployment and unemployabilty remain high, and expectations among youth are rising much faster than the government’s ability to deliver. Current account deficit (CAD ) is not yet low enough to inspire confidence in foreign investors. Land laws enacted under the previous government have created huge challenges for the industry. Obstruction to legislative business remains a worry. Banking sector remains stressed with significant NPAs and credit off-take is yet to increase. An overactive judiciary and investigative agencies have made the bureaucracy even more cautious and led to an environment where decision making has become Poor Monsoon has had an adverse impact on rural demand. Reviving the farm sector – strengthening rural infrastructure, irrigation network, diversification of crops, agri-logistics, cold chain etc. remains a key challenge.
Primary education, healthcare, nutrition and shelter – which are state subjects – under India’s federal constitution, have not as yet received the attention and priority they deserve. The system of revenue sharing between the centre and the states is biased in favour of the centre. India’s metros and urban areas (like Mumbai) which generate most of the wealth, do not receive reciprocal attention in terms of infrastructure and socio-economic development.
Safety remains an area of concern, even as the country mourned the 30th anniversary of Bhopal Gas Tragedy, and India’s industries remain as unsafe as ever. Road, rail, aviation, maritime and port safety, remains areas of concern, with an accident no less than every three minutes. Fire and structure safety records remain worrisome. Safety and secuirty of women remains an area of serious concern – for women, parents, employers and the government.
Businesses in India are likely to be faced with the following risks in 2015:
• Geo-Political Risks – Terrorism, street protests, energy and water security, separatism, external affairs/relations
• Economic Risks – Fiscal deficit, inadequate infrastructure, corporate crime, banking sector frauds, inflation, unemployment and unemployability; unstable currency, oil price volatility, tax barriers and labour issues
• Socio-Economic – Maoism, crime, corruption, communal conflicts, urbanisation pressure, land acquisition issues, shrinkage (theft and losses) and social regulations
• Technology Risks – Critical infrastructure security, Business Continuity and Disaster Recovery, cyber security, online privacy, social media security, piracy, hacking, data theft, virus infection, insider threats
• Environment and Health Risks – Natural hazards, pandemics/diseases, air pollution, waste disposal, clean water scarcity, and bio-diversity loss.
• Safety Risks – Crime against women, road safety, industrial safety, fire safety, structural safety, food and water safety, aviation safety, rail safety.
Conclusion
Overall, in 2015, there is increased business confidence due to reforms and political stability. India would see the impact of policy pronouncements, lower inflation and reducing interest rates.
In 2015, India is less likely to be vulnerable to external shocks. Some external risks could result from unintended consequences of geopolitical tensions, possibility of rapid growth and rate cut in the US and controlled slowing of China (designed to deflate the credit bubble gently) with implications for exports to that country.
The challenges are likely to be largely internal. These include geo-political (turbulent neighbourhood, crossborder terrorism, and radicalisation of youth), economic (banking system with poor asset quality, CAD still not down to comfortable levels), socio-economic (Maoism, unemployment and unemployabilty among youth), environmental (rising pollution levels and health concerns), technological (complex cyber vulnerabilities) and regulatory (land, labour laws etc.).
The next two years would be the defining years of consolidation and policy changes, after which the benefits may start to kick in. A growth of 5.5 to 6.5% in real terms for next 2/3 years can be predicted, if the promised policies are implemented. Overall, a steady, stable, secure and self-confident India, on a fast growth trajectory, is the forecast for 2015 and 2016.
Given the huge size and vast diversity of the country, risks to businesses vary greatly with geographic location and local socio-political setups. Thus, for businesses, a diagnostic for each state may be a more prudent business strategy.
