impact of politic on indian economic environment

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)

© ARUN GULERIA | [email protected]

S.No.

Particular PAGE NO.

REMARKS

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 Scanning 10

7. How companies Handling Environment Scanning 14

8. Literature Review 20

9. Factor Affecting Environment Scanning 23

INDEX

ACKNOWLEDGEMENT© ARUN GULERIA | [email protected]

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.

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.

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.

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 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.

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.


http://samachaar.in/Politics/India_weighing_political_impact_of_tough_economic_decisions_61895/



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 ELECTIONSEmboldened 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 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.

IMPACT OF POLITICS IN INTERNATIONAL MARKETINGGiven 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 GOVERNMENTWorld 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 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 STABILITYMany 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 leadersA report covering these points should be prepared to present evidence of a government’s stability or instability.

GOVERNMENT ECONOMIC MANAGEMENTAnother 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 PolicyMore 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 INVESTMENTMany 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 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 GOVERNMENTIn 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 MANAGERSA 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 INFLUENCEAn 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.

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 forBaghdad 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.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!

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.

THE GROWING POLITICAL PROBLEMAlthough 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.

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.

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 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.


impact of politic on indian economic environment

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