India

Originally published: Jun-22-2006

View More Country Risk Reports

Government

According to its Constitution, which went into effect on January 26, 1950, India is a "sovereign, socialist, secular, democratic republic." Like the United States, India has a federal form of government. However, the central government in India has greater power in relation to its states, and has adopted a British-style parliamentary system.

India gained independence from Britain on August 15, 1947. The country is made up of 28 states and 7 union territories. There are three federal government branches: Executive, which includes the president (chief of state), prime minister (head of government), and Council of Ministers (cabinet); Legislative, a bicameral parliament (Rajya Sabha or Council of States, and Lok Sabha or House of the People); and Judicial, the Supreme Court.

Population

India’s estimated population in 2006 is just over 1 billion. Annual population growth for 2006 is estimated at 1.38%. Although India occupies only 2.4% of the world’s land area, it supports over 15% of the world’s population. Only China has a larger population.

Nearly two-thirds of the population depends on agriculture for its livelihood. About 25% of the population lives below the poverty line, but there is a large and growing middle class of 320-340 million with disposable income for consumer goods.

India has a diverse list of spoken languages. At least 30 different languages and 2000 dialects have been identified. The Constitution of India has stipulated the usage of Hindi as the official language and English as the associate official language for official communication for the national government. English is also the primary language of business in India.

Legal System

The Indian legal system is based on English common law with limited judicial review of legislative acts. It accepts compulsory International Court of Justice jurisdiction, with reservations. Separate personal law codes apply to Muslims, Christians, and Hindus.

While the Indian judicial system is independent and consists of competent judges, it suffers under an extensive bureaucracy and permanent backlogs. Thus, legal action is time consuming and cumbersome.

Economy

Currency: INR (Indian Rupee)

• INR per USD: 45.55051 (as on 5/24/2006)
• INR per EUR: 58.54835 (as on 5/24/2006)

Economic Indicators

Note: India’s Fiscal Year is April 1st to March 31st

(e) estimate (f) forecast

Comparative Economic Indicators (2002)

Source: Economist Intelligence Unit

Leading Markets (2004): USA (18%), UAE (8%), China/Hong Kong (5.1%), UK (4.7%), China (4.6%)

Leading Exports: textile goods, gems and jewelry, engineering goods, chemicals, leather manufactures

Leading Suppliers (2004): China (6.1%), US (6%), Switzerland (5.2%), Belgium (4.4%)

Leading Imports: crude oil, machinery, gems, fertilizer, chemicals

Top Industries: textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software

General Economic Situation

India, the world’s largest democracy, has emerged as a major power and one of the world’s fast growing economies after several decades during which its economy was virtually closed. The country’s diverse economy encompasses traditional village farming, modern agriculture, handicrafts, modern industries and a multitude of services. Services are the major source of economic growth, accounting for half of India’s output. Capitalizing on the country’s large numbers of well-educated people skilled in the English language, the rapidly growing software sector is boosting service exports. Revenues from the information technology industry reached a turnover of $16.2 billion in 2004-05. Software exports crossed $17.2 billion in 2004-05.

Economic growth, however, is constrained by India’s inadequate infrastructure, a cumbersome bureaucracy, corruption, labor market rigidities, regulatory and foreign investment controls and high fiscal deficits. India continues to move forward with market-oriented economic reforms. Recent reforms include liberalized foreign investment and exchange regimes, industrial decontrol, reductions in tariffs and other trade barriers, reform and modernization of the financial sector, and new laws safeguarding intellectual property rights.

Although substantial progress has been made, the government is aware that the pace of reform must continue for India to continue to build upon its recent successes. Other pressures for reform include the Indian consumers’ rising aspirations, the need to attract private capital into infrastructure, and the need to improve social sector delivery.

Business Climate

The Indian market presents diverse opportunities for foreign exporters with the right products and services. Key factors for doing business successfully include: finding partners with knowledge of the local market and procedural issues, good planning, due diligence and follow-up, and patience and commitment. Market challenges include: a slow reform process and inadequate infrastructure.

Conversion and Transfer Policies: There are no restrictions on remittances for debt service or payments for imported inputs. The Indian rupee is fully convertible for current account transactions. Capital account transactions are open for foreign investors, subject to various clearances.

Expropriation and Compensation: There have been few instances of direct expropriation since the 1970s. While a program of privatization of state-owned enterprises stalled in 2004 with a change in government there has been no reversal
in the overall movement away from public ownership of industry.

Dispute Settlement: Foreign investors frequently complain about a lack of "sanctity of contracts." Although Indian courts are independent, they are backlogged with unsettled dispute cases. Foreign awards are enforceable under multilateral conventions like the Geneva Convention. The International Center for Alternative Dispute Resolution (ICADR) has been established as an autonomous organization to promote settlement of domestic and international disputes through different modes of alternate dispute resolution. India is not a member of the International Center for the Settlement of Investment Disputes, but is a member of the New York Convention of 1958.

Right To Private Ownership And Establishment: Subject to certain sector-specific restrictions, foreign and domestic private entities may establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices and liaison offices.

Protection of Property Rights: India has generally adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. Trademark protection is good. Although U.S. firms report few trademark related problems, India's weak judicial system can make it difficult to exercise rights established by the law.

Transparency of the Regulatory System: Even though India has made much progress on economic reform since 1991, the economy is still hobbled by excessive rules and a powerful bureaucracy with broad discretionary powers.

Political Violence: In general, there have been few incidents of politically motivated attacks on foreign projects or installations in recent years. There are violent separatist movements in Kashmir and some northeastern states.

Corruption: U.S. firms have identified corruption as one obstacle to foreign direct investment. Indian businessmen agree that red tape and wide-ranging administrative discretion serve as a pretext to extort money. According to some foreign business representatives in India, the deluge of corruption lies in the 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. Clusters have developed, however, where the business climate is relatively free of corruption.

Business Practices

One of the most striking features about India is the size and diversity of the country. There is a wide urban-rural divide. More than 70 percent of India's population lives in villages, and subsists on agriculture. However there is a growing middle and upper class which is rapidly becoming somewhat Westernized in its interaction with each other and outsiders.

The most common greeting is with hands folded as in a prayer, which is known as namaste [nah-mah-stay]. Women should generally be greeted with folded hands, unless they extend their hands for a handshake first. When men greet each other, they usually shake hands. In general, Indian society is conservative about heterosexual physical contact and relationships. Therefore, one should refrain from greeting people with hugs and kisses.

When addressing a person, it is advisable to prefix the name with a 'Mr.', 'Mrs'. or 'Miss', or the professional title of the person ['Doctor' or 'Professor'] unless the person asks you to refer to him by his/her first name. Superiors are often spoken to as "sir" or "madam". Use of the first name is not common. Business superiors and those senior in age are almost always addressed formally.

Indians appreciate punctuality and keeping one's commitments. However, many visitors to India find it very disconcerting that frequently Indians themselves are quite casual in keeping their time commitments.

Normal business dress for men is a suit and tie. However, since India has a warm climate, often just a full-sleeved shirt with a tie is also acceptable. For foreign women, pant-suits or long skirts, which cover the knees, and modest necklines are most appropriate.

There is generally no need for an interpreter or translation service as English is widely spoken in all circles.

Credit and Collections

• Collection Experience: Good-Fair
• Exchange Delays: 4 months
• Preferred Credit Terms: Unconfirmed Letter of Credit
• Minimum Credit Terms: Unconfirmed Letter of Credit

It is crucial to check the creditworthiness of a potential Indian business partner through banks or credit information companies before sealing a business contract. Credit insurance is another avenue of protection to reduce the risk of selling into the India market. If faced with a default by an Indian buyer, it is important to involve a third party (agency or attorney) familiar with the Indian commercial and legal culture. As legal actions in India are time consuming, it is best to negotiate out of court settlements if at all possible. Arbitration is sometimes more expensive than legal action in India; however, it usually takes much less time and is a more efficient method of handling disputes.

Risk Assessment

Coface Country Risk Rating: A3 -- Adverse political or economic circumstances may lead to a worsening payment record that is already lower than the previous categories, although the probability of a payment default is still low.

Ducroire Delcredere Political Risk Rating: 1 (Low Risk)
Ducroire Delcredere Commercial Risk Rating: B (Medium Risk)

Sources for further information on doing business in India

Doing Business in India, Country Commercial Guide, U.S. Department of Commerce

India in Business: Web site of the Federation of Indian Chambers of Commerce and Industry. Contains extensive information and statistics on India’s economy, doing business in India, trade contacts, etc.

National Portal of India: The official portal of the Indian government. Content is the result of a collaborative effort of various Indian Government Ministries and Departments, at the Central/State/District level.

*****

Subscribe to the Credit-to-Cash Advisor
Monthly e-Newsletter -- It's Free

This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 200 countries including India. For further information, contact info@abc-amega.com.

This report represents a compilation of information from a wide variety of reputable sources including: the U.S. Department of State, U.S. Commercial Service, CIA World Factbook, Federation of International Trade Associations, and Economist Country Briefings.

Risk Assessment information: Provided with permission by Coface Country Rating. Also Belgian credit insurance company Ducroire Delcredere

Information on credit terms and the probability of prompt payment are provided, with permission, from Overseas Press and Consultants (OP&C) as published in IOMA's Report on "Managing Credit, Receivables & Collections," June 2006.