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TERM PAPER

OF
BUSINESS ENVIRONMENT
ON

Impact of Politic on Indian


Economic Environment

SUBMITTED TO:-
Mr.
SUBMITTED BY:-

LOVELY PROFESSIONAL UNIVERSITY


LOVELY INSTITUTE OF MANAGEMENT (LIM)

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INDEX
S.N Particular PAGE REMAR
o. NO. KS

1. Acknowledgement 3

2. Introduction 4

3. Method of Environment Scanning 6

4. Environmental Scanning Cycle 8

5. Structure of Environment Scanning 9

6. Importance of environment 10
Scanning
7. How companies Handling 14
Environment Scanning
8. Literature Review 20

9. Factor Affecting Environment 23


Scanning

ACKNOWLEDGEMENT

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I take this opportunity to offer my deep gratitude to all
those who have extended their valued support and
advice to complete this term paper. I cannot in full
measure, reciprocate the kindness showed and
contribution made by various persons in this endeavor.

I acknowledge my sincere thanks to Mr.


(Faculty Member) who stood by me as a pillar of strength
throughout the course of work and under whose mature
guidance the term paper arrives out successfully. I am
grateful to his valuable suggestions.

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INTRODUCTION
ECONOMY OF INDIA:
India's diverse economy in based on some conventional methods like the traditional village
farming, modern agriculture, handicrafts, a wide range of modern industries, and other wide
range of services. The overall economic growth of India is not as proportional to the labour
efforts that are put in. The various services that are provided by the country are the basic
foundation of economic growth. A major portion of the population is involved in the agricultural
sector. Due to the indulgence of a major percentage of the population in the agricultural and rural
industries like the cottage industries, the government is trying to increase the basic and essential
infrastructure that is used in the development of the rural life and the increase in overall standard
of living in these regions. The government of India has reduced controls and taxes on foreign
trade and investment for the betterment of the people. The difference between the economy and
politics of India is minute but definitely has the attention of people all over the country.

POLITICS IN INDIA:
India is one of the largest democratic countries in the world. India provides the biggest number
of provisions to the people of this country. These provisions include franchise rights and the
largest number of political parties. The percentage of the population that votes for the periodical
elections was high previously but has depleted in recent times. Elections are held at different
strata. The two important governments that are formed after the elections are the national level
elections and the state level elections. The National government is established after the national
elections while the state government is established after the state elections. There are various
other elections that are held at city, town and village level. The economy and politics of India
have interested people all over the world.

POLITICAL ISSUES AND DISPUTES:


There exist different political issues in Indian politics, which are at national level or at the
regional level. Some communities demand more rights for their communities, which can be
classified as economical and social rights. Some communities in particular regions ask for
autonomous status while some ask for independent state itself. Even after facing so many
political problems, India still survives as a democratic state. The main office holders are
President, Vice-president and the Prime minister. The various political parties that exist in
democratic India can be categorized as National Democratic Alliance, United Progressive
Alliance, Left front and others.

THE POLITICAL ENVIRONMENT


No matter how attractive the economic prospects of a particular country or region are, doing
business there might prove to be financially disastrous if the host government(s) inflicts heavy
financial penalties on a company or if unanticipated events in the political arena lead to the loss
of income-generating assets.

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The political environment in which the firm operates (or plan to operate) will have a significant
impact on a company's international marketing activities. The greater the level of involvement in
a foreign markets, the greater the need to monitor the political climate of the countries business
is conducted. Changes in government often result in changes in policy and attitudes towards
foreign business. Bearing in mind that a foreign company operates in a host country at the
discretion of the government concerned, the government can either encourage foreign activities
by offering attractive opportunities for investment and trade, or discourage its activities by
imposing restrictions such as import quotas, etc. An exporter that is continuously aware of shifts
in government attitude will be able to adapt export marketing strategies accordingly.

Nearly all governments today play active roles in their countries' economies. Although evident
to a greater or lesser extent in most countries, government ownership of economic activities is
still prevalent in the former centrally planned economies, as well as in certain developing
countries which lack a sufficiently well developed private sector to support a free market system.

The implications of government ownership to a company marketing abroad might be that certain
sectors of the foreign market are the exclusive preserve of government enterprise or that the
company is obliged to sell directly to a state trading organization. In either case, the company's
influence on the market is greatly reduced. Similarly, if an exporter is seeking to establish a
subsidiary in a country where there is a high degree of state influence over the factors of
production, the investor should bear in mind that marketing activities in the country concerned
may be restricted and that the so-called controllable elements of the marketing mix will be less
controllable.

Of primary concern to an exporter should be the stability of the target country's political
environment. A loss of confidence in this respect could lead to a company having to reduce its
operations in the market or to withdraw from the market altogether. One of the surest indicators
of political instability is a frequent change in regime. Although a change in government need not
be accompanied by violence, it often heralds a change in policy towards business, particularly
international business. Such a development could impact harshly on a firms long-term
international marketing programmer.

Reflected in a government's attitudes and policies towards foreign business are its ideas about
how best to promote national interest in the light of the country's economic and political
resources and objectives. Foreign products and investment seen to be vital to the growth and
development of the economy often receive favorable treatment from the government in the form
of reduced tax, exemption from quotas, etc. On the other hand, products considered by a
government to be non-essential, undesirable, or a threat to local industry are frequently subjected
to a variety of import restrictions such as quotas and tariffs. It is also important to be aware of the
nature of the relationship between South Africa and the foreign target market. This was a major
consideration during South Africa's political isolation. Fortunately, South Africa's international
relations have normalized and today South Africa is viewed very favorably, from a political
perspective, by the rest of the world. The political environment is connected to the international
business environment through the concept of political risk.

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POLITICAL RISK:
Political risk can be defined as the impact of political change on the export firm's operations and
decision-making process. Political risk is determined differently for different companies, as not
all of them will be equally affected by political changes. For example, industries requiring heavy
capital investment are generally considered to be more vulnerable to political risk than those
requiring less capital investment. Vulnerability stems from the extent of capital invested in the
export market, e.g. capital-intensive extracting or energy-related businesses operating in the
foreign market are more vulnerable than manufacturing companies.

Political risk is of a macro nature when politically inspired environmental changes affect all
foreign investment. It is of a micro nature when the environmental changes are intended to affect
only selected fields of business activity or foreign firms with specific characteristics, (possibly
by expropriation).

When business is conducted in developing countries, the risks of greatest concern are civil
disorder, war and expropriation. When business is conducted in industrialized countries, labour
disruptions and price controls are generally seen to pose the greatest threats to a company's
profitability.Expropriation is the take-over of a foreign firm located in a host country, by the host
country's government.

All organizations doing business abroad should be aware of the fact that what they do could be
the object of some political action. Hence, they need to recognize that their success or failure
could depend on how well they cope with political decisions, and how well they anticipate
changes in political attitudes and policies.

INDIA WEIGHING POLITICAL IMPACT OF TOUGH ECONOMIC


DECISIONS:
The Reserve Bank of India (RBI) did take one rapid decision to cut the cash reserve ratio, which
has already unleashed about Rs. 600 billion (around $13 billion) in the market, but frantic
bankers are saying this is just not enough to contain the crisis. With the global crisis getting
worse every day, there seems to be no end in sight to the bloodbath on Wall Street or Dalal
Street. And the proposed committee on liquidity has been given a week to submit proposals
which seems to be seven days too long during this unprecedented global financial crisis.

Described as the worst banking crisis of the last century, the current financial turmoil is even
being compared with the Great Depression of 1929 but there is a critical difference - the global
reach of the situation in today' times. Globalization has meant financial markets all over the
world are interconnected. Thus markets from Russia to Thailand, China to Iceland are facing
grave pressures on the economy.

Even India, which was considered immune to the fever consuming the US and European
bourses, has fallen prey to the virus in a much greater degree than had been imagined by any

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stock market analyst and expert. Concerns in this country for the last few months had centered
round inflation and excess liquidity in the markets. The situation has now completely reversed
and the central bank suddenly has to worry about shortfall in liquidity.

The apparently slow response of the Indian government to the crisis despite many soothing
comments made by Finance Minister P. Chidambaram has much to do with the political outlook
for the next few months. A virtual mini-general election is on the cards in November with as
many as six states going to the polls. This is likely to be a kind of referendum to next year's
general elections and the state of the economy is going to be a key factor in winning or losing.

Inflation at double digit levels has already hit the common man hard. So policy makers have till
now been strenuously trying to ensure that price rise remains contained to the extent possible.
Their efforts have largely been stymied by the phenomenally high world crude oil prices that
have had their impact on the Indian economy inspite of the minimal pass-on to the consumers at
the retail level.

Even so, inflation seems to have peaked and is now hovering around 11.5 per cent but
moderation to single digit levels is expected only by the end of the year. In this backdrop, the
latest crisis with the stock markets crashing and rupee falling to record lows against the dollar
has come as yet another blow to a government looking forward to reap the benefits of its
achievements before the elections.

Instead of triumphantly hailing the signing of the Indo-US nuclear deal, Prime Minister and
finance minister have had to make calming announcements about the continued stability of the
banking system, stock markets and the economy in general. It is all the more disturbing for them
since the banking system in this country has not been exposed directly to the sub-prime crisis in
the US and is actually only suffering from the indirect impact of the ills facing the entire global
regime. In fact, it was the inherent strength of Indian banks that made most analysts confident
that the sub-prime crisis would blow over without having a significant impact on this country.

Unfortunately, India can no longer remain immune to worldwide financial panic and this has
been reflected in the country's bourses that have crashed during the past week. One of the major
factors for this has been the pullout of foreign institutional investors (FIIs) who have had to
deploy their funds elsewhere owing to the worldwide meltdown.

To add to the misery of investors, the rupee has fallen to historic lows against the dollar. This is
again an anomaly since there have been more concerns about the rupee appreciating strongly
against the dollar in recent months, especially as it had affected export efforts. And the final
blow, of course was industrial growth data showing a minimal 1.3 percent rise, clearly indicating
that recessionary conditions have crept into the manufacturing sector.

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On the plus side, the government has made all the right noises to soothe the stock markets,
which are generally prone to move nervously in times of financial crisis. The crash of bourses
globally is being described as panic selling and the situation is no different in this country.

But on the negative side, the central bank and the government have not moved fast enough to
deal with this completely new and unexpected reality of stock markets moving down in
alignment with exchanges in the rich countries. They will have to take decisions such as interest
rate cuts to release more liquidity into the system and allow the corporate sector to make further
investments in infrastructure and manufacturing to prevent the onset of a recession.

Some say the government is in denial and is unwilling to face the reality of the current crisis.
The fact is that it is alive to the reality but is uncomfortably aware of the political impact of the
decisions that will have to be made in the next few days and weeks. And that has slowed down
its response. But the very fact that Chidambaram has cancelled his trip to the annual meeting of
the International Monetary Fund (IMF) has raised hopes that palliative measures will be taken
sooner rather than later.

IMPACT OF ELECTIONS
Emboldened by the results, Left parties said the victory strengthened their role in national
politics and warned the Congress not to take its support at the Centre for granted. The first
casualty could well be the Congress-led United Progressive Alliance government’s move to hike
fuel prices, including that of cooking gas.

Kerala and West Bengal have brought “big responsibilities” for his party. The CPI was more
vocal. Making it clear that the Congress should not ignore the concerns of the Left parties on
economic and foreign policies, CPI secretary D Raja said the Congress should draw a lesson
from the people’s mandate.

Finance minister P Chidambaram, often under Left attack on his reforms agenda, put up a brave
front. There was no reason to assume the Left would be unreasonable in its triumph and
Congress unnecessarily timid, he said. “Both have their strengths and have worked together for
two years. There is no reason for the two sides not to be able to work together for the next three
years,”

Positive Outlook the BSE Sensex and the Nifty are likely to continue to move upwards on a
buoyant mid-to-long term economic outlook, short-term fall in crude oil price and a possibility of
a muted hike in retail petroleum product prices. The real stars, however, could be the small and
the mid-cap stocks. The institutional and retail investors are queuing up for these equities as a
large majority of them are perceived to be dramatically transforming their profile. It would not

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be surprising if the BSE Mid Cap and Small Cap indices outperform the bellwether index in the
short-term.

As country's infrastructure spend is increasing, the cascading effect on the balance sheets of a
whole range companies are becoming more and more visible. Though, concerns have been
expressed, by some global investment firms and multilateral financing institutions, about the
country's ability to absorb oil shock, so far the liquidity - driven the domestic stock remained
unaffected.

Global investor community is gradually veering round the idea that India's growth momentum
could actually accelerate despite external negatives and internal inadequacies. The signals from
investment banking and private equity circles suggest that apart growing portfolio money, India
could witness a quantum leap in overseas investments in the country this fiscal.

Political environment is another factor affecting the foreign market. It is necessary for an
international marketer to assess the political environment since this affect has success as well as
existence in such markets. The study and assessment of the political environment include the
following:

a) Political System: The type of government i.e. whether it is Socialistic, Capitalistic,


Democratic etc. must be analyzed, since the philosophy of the government is reflected in its
policies.

b). Philosophy of the Government: It is essential to study government’s philosophy in particular


about, policy towards private sector and foreign business. Many rules exist in different countries.
For example in India Foreign Exchange Regulation Act 1973, specifies guidelines for foreign
private investment. From all this view points, it is essential for an international marketer to
assess the philosophy of the government in power, as well as the long run political prospective.

c). Permanency and Stability of the Policy of the Government: It is necessary to examine the
extent of permanency and stability of government policy of the target foreign market. The
marketer must always be careful about such changes in policy that lead to its destabilization. The
policy of a government in the field of trade may be rendered unstable, because of any one of the
following factors:

1. Change in Governments.

2. Growing aspirations of nationalism.

3. Shifting of political parties reaching the government at different levels.

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IMPACT OF POLITICS IN INTERNATIONAL MARKETING
Given today’s climate of global economic and political change and the experience of with-
spread nationalizations and expropriations in the 1960s and 1970s, there is a growing recognition
in the business world of the need for a company to “look before it leaps” when considering entry
into a foreign country. Any multinational marketer would be well advised to make a thorough
analysis of political risks as well as risks peculiar to the company’s industry in foreign settings.
History shows that far and away the riskiest ventures are those in developing countries, where
appeals to nationalism are most damaging to multinationals. On the other hand, international

Marketers cannot simply ignore these countries. For the U.S., the developing countries are
increasingly important both economically and politically. During the recessionary period of the
early 1990s, while U.S. exports to industrial countries stagnated or declined, exports to
developing countries continued to expand. Without that demand for U.S. goods, unemployment
and production figures would have been far worse. The political perspectives of a nation should
be examined according to
· Type of government
· Stability of government
· Quality of host government’s economic management
· Change in government policy
· Host country’s attitude toward foreign investment
· Host country’s relationship with the rest of the world
· Host country’s relationship with parent company’s home government
· Attitude toward assignment of foreign personnel
· Extent of anti-private-sector influence or influence of state controlled industries
· Fairness and honesty of administrative procedures
· Closeness between government and people

The importance of these factors varies from country to country. Nevertheless, it is desirable to
consider them all to ensure a complete knowledge of the political outlook for doing business in a
particular country.

TYPE OF GOVERNMENT
World governments can be grouped in four categories: democratic republics, communist
dictatorships, dictatorships and monarchies. In each category there is a spectrum of variation.
Democratic republics are formed through regular elections and have party systems. In the U.S.
and England, two major political parties are active. Italy and France have several political
parties. In Mexico, one dominant party controls. Communist dictatorships control all business
activity. Such governments exist in Cuba, the People’s Republic of China, Vietnam, North
Korea, and Burma. Communist countries maintain various types of ties with foreign business.
Because China desires to achieve economic progress through using western technology and
skills, the business climate there has been favorable. Dictatorships are authoritarian regimes.
These governments are run either by military dictators as in Pakistan or by civilian dictators as in
Libya. Military dictators often eventually adopt a civilian posture, usually by holding an election
that gives the appearance of a government elected by popular vote. Authoritarian governments
can be further categorized according to economic philosophy. They may be left wing or Marxist

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oriented, or right wing and directed toward for enterprise. Finally, monarchies are governments
in which the ruler derives power through inheritance. A country may have a monarchy and yet be
democratic such as Great Britain, where Queen Elizabeth II is titular head of the country but not
head of the British Government. But in many countries, the government is actually run by the
monarch. Saudi Arabia and Jordan have monarchies. The shah of Iran was a reigning monarch. A
monarch may have political inclinations to either the left or the right. Any review of a country’s
political system and its impact on foreign business must remain free of stereotyped notions. Both
current and emerging perspectives need to be changed.

GOVERNMENT STABILITY
Many countries have frequent changes of government. In such a climate, a foreign business may
find that by the time it is ready to implement an agreement, the government with whom the
initial agreement was arranged has changed to one that is not sympathetic to the commitments
made by its predecessor. In a democratic situation, the incumbent party’s strength or the
alternative outcomes of the next election can be weighed to assess the likelihood of change. In
other situations, a variety of symptoms could point toward governing instability.
· Public unrest (demonstrations, riots, or other demonstrations of social tension)
· Government crises (opposition forces trying to topple the government)
· Armed attacks by one group of people on another, or by groups from a neighboring country
· Guerrilla warfare
· Politically motivated assassinations
· Irregular change in top government leaders
A report covering these points should be prepared to present evidence of a government’s stability
or instability.

GOVERNMENT ECONOMIC MANAGEMENT


Another factor is to examine the quality of the host government’s economic management. The
economic environment of a country should be studied in the political context with reference to
· The ability of the government to sustain its internal and external debt.
· The country’s pursuit of stable and diversified economic growth. The country’s ability to
generate an adequate amount of foreign exchange.
· The nature of the various fiscal and monetary means used to steer the economy.
· The quality of the long-term planning of economic policy and its implementation.
An example, a country that continues to live on borrowed funds, either from private sources or
international agencies like the IMF, and frequently defaults on payments demonstrates poor
economic management. Change in Government Policy
More than anything else, MNCs dislike frequent policy changes by host countries. Policy
changes may occur even without a change in government. It is important, therefore, for the
foreign business to analyze the mechanism of government policy changes.

ATTITUDE TOWARD FOREIGN INVESTMENT


Many nations look upon foreign investment with suspicion. This is true of both developed and
developing countries. Developing countries are usually afraid of domination and exploitation by
foreign business. In response to national attitudes, these nations legislature put a variety of laws

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and regulations to prescribe the role of foreign investment in their economies. Indirectly, the
success of other multinational business in a country indicates a favorable climate.

INTERNATIONAL STANCE OF GOVERNMENT


Countries that maintain amicable political relationships with the rest of the world and have
respect for international law and order show political maturity. These countries can be expected
to behave in a responsible fashion. For less spectacular situations, membership in regional and
international organizations as well as adherence to bilateral and multilateral principles and
agreements provides evidence of a country’s relationship with other nations.

RELATIONSHIP WITH PARENT COMPANY’S HOME GOVERNMENT


In theory, MNCs have no political alignment. Yet a company originating in the U.S. will
continue to be known as a U.S. Company even though it may derive a major portion of its
revenues and profits from operations outside the U.S. The best example for this is Nestle
Company. Thus, the relationship between the host country government and the parent company
government will affect, either directly or indirectly, the MNC. International marketers should
therefore trace the history of the relationship between the host country’s government and the
home country government before deciding to enter a market.

ATTITUDE TOWARD FOREIGN MANAGERS


A company making an investment in a foreign country needs to make sure that its business there
is managed effectively. Among other factors, a crucial determinant of success in overseas
operations is the assignment of experienced persons to key positions.

ANTI-PRIVATE-SECTOR INFLUENCE
An interesting development of the post-World War II period has been the increased presence of
government in a wide spectrum of social and economic affairs that were previously ignored by
government. In a great many foreign countries, such concerns have led governments to take over
businesses to be run as public enterprises. Also, public sector enterprises are not limited to
developing countries. Obviously, in nations where there is an ongoing bias against homegrown
private businesses, an MNC cannot expect a cordial welcome. In such a situation, an MNC must
contend with the problems that arise because of it being a private business as well as a foreign
one.

Politicians could be making the economic slowdown in the U.S. worse than it really is by
constantly reminding voters that the economy needs fixing. This is the view of some analysts
who say that because consumer spending is the primary engine that drives U.S. economic
growth, negative messages during this election year cycle can have a dampening effect on the
world's largest economy.

Rising unemployment, the housing downturn and stock market plunges have made the state of
the economy the number one issue for voters -- replacing the Iraq war.

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This has led presidential hopefuls from both the Democratic and Republican parties to work
hard at convincing Americans that they have the knowledge, experience and wisdom to heal the
ailing economy

And when people are worried, North says they tend to spend less. "Most of our economy is
based on people spending - that is buying milk, buying cars, and suits and TVs, and that sort of
thing. That's what drives our economy. Two thirds of our economy is driven by consumers. So if
consumers stop spending because the economy is slowing, it's gonna be yet another drag on the
economy itself."

Even financial markets are not immune. Tom Hertz, an economics professor at American
University, says investors react in similar fashion to stock market psychology. He says what
happens in U.S. markets often has a chilling effect on markets around the world. "Well, suppose
you're a Japanese investor and you discover that there's something going wrong in the American
market and you think it may or may not affect the Japanese market, well, just to be sure, you sell,
right? So -- self-fulfilling prophecy - it does affect the Japanese market."

Any recovery of the slumping U.S. housing market may be similarly affected. Economists say
fears that the U.S. economy may already be in a recession is causing some buyers to think twice
before making any big purchases.

UNDERSTANDING THE IMPACT OF POLITICAL RISK ON BUSINESS


STRATEGY:
The link between politics and big business is as old as time. Over 200 years ago, The East India
Company led the British acquisition of India. In the early years of the last millennium, the US
was busy colonizing the farm produce of Central and South American nations. In the 1960s, The
Shah of Iran was a friend of USA. More recently, the currency crash of the Asian Tigers in 1997
exposed the systemic rot of crony capitalism, which resulted in the change of government in at
least two nations, Indonesia and Thailand. And just a few years ago, in the US, certain firms had
advance knowledge of the imminent assault on Iraq and were busy preparing rebuilding plans for
Baghdad even before the first missiles of Gulf War II were fired. Closer to home, a favourite
topic of debate in the cocktail circuits is the involvement of politicians in big business. One hears
stories of Chief Ministers in distress announcing economic development projects to shore up
their political fortunes. However as we have seen of late, the best laid plaques and foundation
stones are routinely ravaged by the changed political climate that follows. Even so, the private
sector is known to participate in these situations with their eyes wide open. Yet, some good
occasionally comes out of the political-private industry “nexus”. In certain parts of India, the
real-estate boom has often been the result of a working relationship between political gain and
private initiative. In this article we shall examine the consequences of the nexus between politics
and the corporate world and assess the comparative importance of political insight. While I am
not going to delve in to the ethics of where economic opportunities and political motives
comfortably intersect, we shall examine how a business strategist can assess and assign political
risk.

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THE BASIS OF CORPORATE STRATEGY: The core intent of business strategy is
to create competitive advantage. Thus, when a company works closely with a political situation it
is seeking an advantage which will give it a huge lead over its competitors. However, political
insight is only half the battle. Competitive advantage is garnered through a symbiotic
relationship between resources, organizational skills and business expertise.

To achieve competitive advantage, each arm of this triangle has to be strong enough to support
the triangle uniformly. The company must be in a position to leverage this triangle of strengths to
bring about competitive advantage. The point is, when these three arms of the triangle do not
match up, any political advantage that the company has eventually falls away. So, political
advantage is not necessarily a winning card.

UNDERSTANDING THE WILL OF THE PEOPLE AND THE MIND OF THE


POLITICAL LEADERSHIP:
In a democratic environment, these two elements should ideally fuse in symphony and not ring
out as discordant notes. A savvy strategist needs to read the script well. Sometimes, the will of
the people is not clearly understood by the political leadership, as we saw in the 2004 General
Elections. In the state of Andhra Pradesh, Chandrababu Naidu, with all his good intent of making
his state a model investment destination was voted out. In the state of Madhya Pradesh, the call
of the opposition, who eventually won, was Bijli Sadak Pani. The message was simple, vote for
us and we will ensure better supply of electricity, better roads and enough drinking water. The
will of the people had been clearly identified in this case!

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TRACK RECORD OF THE POLITICAL LEADERSHIP:
There are no prizes for guessing the answer to this question. What needs to be done to bring
investments to Bihar? However the next question is a little more thought provoking: Is it worth
investing in Jharkhand? The mineral-rich state, eked out of Bihar, remains a region of
contradictions. Political leadership to a business entity is about conveying a sense of stability and
progress. When both, stability and progress are missing, the choice is clear.

TIMING OF THE BUSINESS OPPORTUNITY:


The timing of a business opportunity is sometimes loaded with great risk. Particularly in a
politically vibrant country as ours, the media is always a step ahead of industry to sniff out a
scam. The recent elections in Iran have thrown up a president, Mahmoud Ahmadinejad, who is
not well known outside his country. The business community, particularly in the oil and gas
sector is worried. The mood among the Indian companies doing business with Iran is at best,
quiet and certainly not upbeat. It remains to be seen how the dust settles and whether companies
such as Indian Oil and the Hinduja Group are able to continue with their business plans in Iran as
usual.

THE THREE STRATEGIC OPTIONS:


If a company is given the opportunity of super profits due to political insight, how should it
approach the situation? The first step would be to keep in mind that competitive advantage is
borne out of the three arms of Resources, Business acumen and Organizational capabilities
locking strongly as shown in Figure 1. Beyond that an impartial assessment of political risk as
per the four parameters liste above, will lead the company to three choices:

The first and easiest option, is a no go or a clear indication that the political risks on the ground
are too high and it is best not to invest in a particular region in the immediate time frame.The
second option is to capitalize on a short-term window of opportunity for mid- or long-term
gains. With no effective laws in place to deny or control access to homes, Star pioneered a new
market, which today has over 60 million homes and is a driving force in the entertainment
industry. What Star sensed was an opportunity wherein the target audience was ready for 24-
hour television with multiple programming options. The Cable Televisions Networks
(Regulations) Act was put in place only in 1995 to regulate cable television. By then the original
owner of Star, Li Kai Shin and his son Richard Lee were ready to move on. In 1995 they sold
their company to Rupert Murdoch’s NewsCorp.

The last option is a long-term one. Here, a company adapts to new geography while keeping
core value propositions intact. The fast food giant McDonalds studied the Indian market place
for a good two years before making a move. What it did essentially was to test whether its core
value proposition would remain intact, all things considered. In the process it has discounted the
political risks for a reasonable period of time and set up systems in India. In reality, large
corporations usually take their time in assessing political risks. It is when the promise of a quick
windfall shows up; haste sometimes gets the better of wisdom.

© ARUN GULERIA | arun_guleria@in.com


THE GROWING POLITICAL PROBLEM
Although we forecast that the growth momentum of Asia's second largest economy will subside,
it is still expected to remain robust. If growth for FY2007/08 reaches the central bank's forecast
8.5% expansion rate, this will only be marginally below the 8.6% average achieved over the past
four years. Inflation remains the biggest threat to this outlook, and supply-side factors, if not
dealt with appropriately, will render these growth rates unsustainable. Unfortunately, infighting
between groups in the United Progressive Alliance, India's ruling coalition, threatens to prevent
any meaningful reform from taking place. Its communist allies have already hampered many of
the government's privatization plans, which the prime minister sees as crucial to boosting GDP
growth to 10%, and are necessary to lift millions of the country's poor above the poverty line.
Continuing down this path would, in effect, render the Congress Party a lame-duck
administration, unable to push through any far-sighted reform measures during its current term.

Following a protracted wrangling between India's ruling Congress Party and its communist
allies, the India-US civilian nuclear energy agreement appears to be on its last legs. This is a
major setback for Premier Singh, who has staked his reputation on this 'historic' landmark deal
and who, by succumbing to the left's demands in order to avoid early elections, has severely
impaired his credibility. The next 18 months could see the Indian National Congress kowtowing
to its allies until the 2009 elections, when only a stronger showing in parliament would allow it
to reduce its reliance on the left.

India's economy expanded by an impressive 9.3% y-o-y in Q1 FY2007/08 (April-March),


buoyed by strong growth in manufacturing and services, which have fuelled inflation concerns.
However, the recent global credit crunch and a strong rupee mean that the central bank will hold
off on hiking interest rates any further for the time being. On the whole it appears as though
economic growth will begin to moderate in the coming quarters. This is because we expect a
tight monetary policy to eventually impact on demand. However, given the positive spillover
effects of last year's robust growth rate of 9.4%, we do acknowledge upside risks to our 8.2%
growth forecast for FY07/08.

The rapidly proliferating and much heralded business prospects arising from India masks a
fundamental development flaw facing the country. Despite a steady increase in inward
investment flows, our data points to deterioration in the region's overall business environment,
which has suffered because of policy decisions that favour short-term investment strategies at the
expense of longer-term goals? The latter would require a marked improvement in infrastructure
development. This trend is a concern as it threatens to accelerate the widening trend of regional
disparity and, consequently, India's business environment rating has been revised down to 39.8
from 40.6 previously.

POLITICAL IMPACT OF TOUGH ECONOMIC DECISIONS:


The tsunami like financial crisis engulfing the globe has flooded India as well, virtually
drowning the stock and currency markets. The response of the Indian government has so far been
somewhat slow. It has set up a committee to study the problem of liquidity as late as Friday,
while the central bank has yet to announce a cut in interest rates.

© ARUN GULERIA | arun_guleria@in.com


The Reserve Bank of India (RBI) did take one rapid decision to cut the cash reserve ratio, which
has already unleashed about Rs. 600 billion (around $13 billion) in the market, but frantic
bankers are saying this is just not enough to contain the crisis. With the global crisis getting
worse every day, there seems to be no end in sight to the bloodbath on Wall Street or Dalal
Street. And the proposed committee on liquidity has been given a week to submit proposals
which seems to be seven days too long during this unprecedented global financial crisis.

Described as the worst banking crisis of the last century, the current financial turmoil is even
being compared with the Great Depression of 1929 but there is a critical difference - the global
reach of the situation in today' times. Globalization has meant financial markets all over the
world are interconnected. Thus markets from Russia to Thailand, China to Iceland are facing
grave pressures on the economy.

Even India, which was considered immune to the fever consuming the US and European
bourses, has fallen prey to the virus in a much greater degree than had been imagined by any
stock market analyst and expert. Concerns in this country for the last few months had centered
round inflation and excess liquidity in the markets. The situation has now completely reversed
and the central bank suddenly has to worry about shortfall in liquidity.

The apparently slow response of the Indian government to the crisis despite many soothing
comments made by Finance Minister P. Chidambaram has much to do with the political outlook
for the next few months. A virtual mini-general election is on the cards in November with as
many as six states going to the polls. This is likely to be a kind of referendum to next year's
general elections and the state of the economy is going to be a key factor in winning or losing.

Inflation at double digit levels has already hit the common man hard. So policy makers have till
now been strenuously trying to ensure that price rise remains contained to the extent possible.
Their efforts have largely been stymied by the phenomenally high world crude oil prices that
have had their impact on the Indian economy in spite of the minimal pass-on to the consumers at
the retail level.

Even so, inflation seems to have peaked and is now hovering around 11.5 per cent but
moderation to single digit levels is expected only by the end of the year. In this backdrop, the
latest crisis with the stock markets crashing and rupee falling to record lows against the dollar
has come as yet another blow to a government looking forward to reap the benefits of its
achievements before the elections.

Instead of triumphantly hailing the signing of the Indo-US nuclear deal. It is all the more
disturbing for them since the banking system in this country has not been exposed directly to the
sub-prime crisis in the US and is actually only suffering from the indirect impact of the ills
facing the entire global regime. In fact, it was the inherent strength of Indian banks that made
most analysts confident that the sub-prime crisis would blow over without having a significant
impact on this country.

© ARUN GULERIA | arun_guleria@in.com


Unfortunately, India can no longer remain immune to worldwide financial panic and this has
been reflected in the country's bourses that have crashed during the past week. One of the major
factors for this has been the pullout of foreign institutional investors (FIIs) who have had to
deploy their funds elsewhere owing to the worldwide meltdown.

To add to the misery of investors, the rupee has fallen to historic lows against the dollar. This is
again an anomaly since there have been more concerns about the rupee appreciating strongly
against the dollar in recent months, especially as it had affected export efforts. And the final
blow, of course was August's industrial growth data showing a minimal 1.3 percent rise, clearly
indicating that recessionary conditions have crept into the manufacturing sector.

On the plus side, the government has made all the right noises to soothe the stock markets,
which are generally prone to move nervously in times of financial crisis. The crash of bourses
globally is being described as panic selling and the situation is no different in this country.

But on the negative side, the central bank and the government have not moved fast enough to
deal with this completely new and unexpected reality of stock markets moving down in
alignment with exchanges in the rich countries. They will have to take decisions such as interest
rate cuts to release more liquidity into the system and allow the corporate sector to make further
investments in infrastructure and manufacturing to prevent the onset of a recession.

This may not be the best move politically as it may push up inflation for the time being, but
clearly there is little option right now. And since there is no room to maneuver, the government
might as well act as fast as possible before any more damage takes place.

Some say the government is in denial and is unwilling to face the reality of the current crisis.
The fact is that it is alive to the reality but is uncomfortably aware of the political impact of the
decisions that will have to be made in the next few days and weeks. And that has slowed down
its response. But the very fact that Chidambaram has cancelled his trip to the annual meeting of
the International Monetary Fund (IMF) has raised hopes that palliative measures will be taken
sooner rather than later.

POLITICAL FACTOR WHICH AFFECT THE GROWTH RATE


ECONOMY:
Political systems can be classified based on the party system in the society, and mode in which
governments attain power. Based on the way governments come into power, they can be
classified into parliamentary type or absolutist type. The citizens elect parliamentary
governments. Absolutist governments are not elected. They come into power by force.

Based on the number of parties active in a country, the political establishment can be classified
into four types: single-party, two-party, multiparty, and one-party dominated systems. In a

© ARUN GULERIA | arun_guleria@in.com


single-party system there is only party. This party has absolute power. In a two-party system two
major groups with differing political philosophies compete for control of the government. In a
multiparty system no single party may have the strength to form the government.

As a result, parties enter into coalitions with many small parties to form the government. In a
system dominated by a single-party, although there are many parties, only one party is strong
enough to form the government. To understand and assess the political environment of a
company it is necessary to identify and evaluate factors that can cause political instability. Social
unrest, attitudes of nationals, and policies of the host government are some factors that can cause
social instability. Political risk refers to political actions that have a negative impact on a firm's
value. Companies operating internationally have to deal with foreign politics, domestic politics,
and international politics.

The political environment in the host country is referred to as foreign politics. A company may
face problems due to a political crisis in its parent country also. This crisis is confined to
domestic politics. Political relations between two or more countries also affect business relations
between the countries. A company can face problems if the relations between the country in
which the firm operates and the country from which it hails are not good.

The process of establishing a cause-and-effect relationship between political factors and


business income is called political risk analysis. Some government policies that adversely affect
the business environment include non-convertibility of currency, preventing the repatriation of
profits, nationalization and inadequacy of compensation, and domestic political violence.
Political risk analysis is an ongoing function and is not restricted to the initial investment
decision. Publications of political analysts, international rating agencies and the views of
employees of the foreign subsidiaries are some of the sources of information on political risk.

Companies operating internationally employ different strategies to reduce their political risk.
The strategic techniques are: Integrative technique, Protective/Defensive techniques. A company
adopting the Integrative Technique tries to blend with the host country’s ethos. Companies can
minimize the political risk they face by adopting Protective Techniques. A company can locate
its key operations beyond the control of the host country government.

© ARUN GULERIA | arun_guleria@in.com