Corruption Current: India

With 1.3 billion people, India is the second most-populated country in the world. At the rate India’s economy is growing, some estimate that the country will surpass the U.S. by 2030 as the world’s second largest economy.  Despite the complexity and challenges of conducting commerce in India, its importance cannot be questioned.

India is a complex country where religious conflicts, caste conflicts, and corruption are all hard-wired into the nation’s psyche. While newcomers to India face a long road in adapting, some not only survive... they flourish.

Consider that Transparency International, the global arbiter for bribery, has reported that seven out of ten Indians have paid bribes to obtain simple government services in the country, but also that India is the most corrupt nation through all of Asia.

Bordering six countries and surrounded by the Arabian Sea and Bay of Bengal, India operates eight main seaports. India’s main export destinations include the U.S., UAE, Hong Kong and China.

India’s GDP expanded 5.8% in March 2019 over the prior year. The Real Growth Rate decreased from 8.2% in 2015 to 6.7% in 2017.The country’s main industries are textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software, and pharmaceuticals.  India exports more than $35 million in goods to the U.S. every year.

Yet, there is a significant wealth gap in the country with nearly 60% of Indians living on less than $3.10 a day. Only one percent of the population controls 73% of the country’s wealth. 

Large U.S. companies, including Ford, GE, J.P. Morgan, Pfizer, Cisco, and McDonalds, have begun to increase their holdings and expand in India. India may become an important player in the global economy, however, it may fall victim to poor government and hardened business practices making India a long-term risk for businesses.

Key Risks

Prime Minister Narendra Modi, with the Bharatiya Junta Party, has declared that more economic development is one of his primary objectives. The Bharatiya Junta Party was founded in 1980, emerging from the Bharatiya Jan Sangh party, and is the country’s Hindu party.

Modi won the election also with a promise to clean up corruption within the government and business. It appears, however, that little has been done to make good on that promise. While Modi and the party have claimed corruption is a barrier to India’s success, it is still prevalent at all levels of business and government.

KLINK’s own experience after conducting hundreds of due diligence investigations of people and businesses, show strong and repeated patterns of government and commercial corruption in India.  Bribing government officials to get contracts, punish competitors, obtain permits, and get better tax rates is part of the fabric of doing business in this massive country.

India scored a 41 on the 2018 Transparency International Corruption Perceptions Index (0 being most corrupt and 100 being least). India’s score has improved little over the past three years and the country is currently ranked 78 out of 180 countries that were assessed by Transparency International. It is unlikely that corruption will improve any time soon under the current regime.

In 2018, Modi and fellow countryman Mehul Choksi were linked to the largest bank fraud case in India.  The scam reportedly involved India’s second largest bank, Punjab National Bank (PNB), being defrauded an estimated $2 billion. With the Indian government intertwined with the banking sector, managing money in India can be viewed as a major risk.  

India is one of the world’s largest coal producers. The BJP decided to allot more mines to both private and state-owned entities once it was realized that the entity Coal India Limited would not be able to produce enough coal.  The BJP selection process was anything but transparent. Between 2006 and 2009, licenses were distributed almost equally between private companies and government-owned entities. Several private firms were accused of selling coal meant for private usage on the open market. The independent Comptroller and Auditor General of India (CAG) reported that the country lost $33 billion through cheap sales.  Similar scams have been involved in multiple other sectors, including in the notorious 2008 telecom scandals where $40 billion in licensing fees were initially lost to a rigged process.

The Indian legal process has been described by some as slow, unpredictable, and susceptible to corruption.  Many experts suggest arbitration as a better alternative to the government courts.

Lokpal, an anti-corruption body, has been established after the passing of the Lokpal and Lokayuktas Bill, 2013. However, a head of the committee has yet to be appointed therefore not much work has been done to combat the corruption in the country.

Our Approach

KLINK recommends conducting market entry assessments that identify specific political, security, labor, employment, environmental, tax, corruption, and other risks before committing funds to the country.  Due diligence on prospective partners is essential in every nation, but in growth economies like India, where corruption is common, it’s even more important.

One consideration: the foreign registered entities corporate tax rate is 50%, whereas the India registered entities corporate rate remains at 30% rate. Entering India also often requires partnering with others.  Due diligence must be performed to examine political exposure and party affiliations on prospective business partners, including beneficial owners, directors and managers. Interviewing knowledgeable sources to uncover hidden risks and reputational checks of the firm and affiliated individuals is highly recommended.

Ongoing compliance programs should include regular audits on vendors (include audit rights in contracts), mandatory ethics training for employees and third-parties, and the implementation of a robust reporting hotline. 

Risk Rating

On a scale of 1-10, with one being low-risk and 10 being high-risk, KLINK ranks 8.

Key Takeaways

  • The wealthiest 1% control over 73% of India’s total wealth
  • Corruption is common
  • The governments involvement with banking and policy creates inconsistent regulations

Download the Corruption Current