Sovereign Risk
India is an effervescent parliamentary democracy since its political
freedom from British rule more than 50 years ago. The country does not
face any real threat of a serious revolutionary movement which might
lead to a collapse of state machinery. Sovereign risk in India is hence
nil for both "foreign direct investment" and "foreign
portfolio investment." Many Industrial and Business houses have
restrained themselves from investing in the North-eastern part of the
country due to unstable conditions. Nonetheless investing in these parts
is lucrative due to the rich mineral reserves here and high level of
literacy. Kashmir on the northern tip is a militancy affected area and
hence investment in the state of Kashmir are restricted by law.
Political Risk
India has enjoyed successive years of elected representative government
at the Union as well as federal level. India suffered political
instability for a few years in the sense there was no single party which
won clear majority and hence it led to the formation of coalition
governments. However, political stability has firmly returned since the
previous general elections in 1999, with strong and healthy coalition
governments emerging. Nonetheless, political instability did not change
India's bright economic course though it delayed certain decisions
relating to the economy. Economic liberalization which mostly interested
foreign investors has been accepted as essential by all political
parties including the Communist Party of India (Marxist) which is dead
against a free economic world.
Political instability in India, in terms of different ideologies of
political parties hence posed no real risk to foreign direct investors
as no policy framed by a past government has been upturned by any
successive government so far. Though there are bleak chances of
political instability in the future, even if such a situation arises the
economic policy of India would hardly be affected. As far as terrorism
is concerned no terrorist threat has been so far able to jeopardize the
state economy. Except for Kashmir in the north and few parts of the
north-east, terrorist activity is either non-existent or too weak to
cause any repercussions. Being a strong democratic nation the chances of
an army coup or foreign dictatorship are minimal. Hence, political risk
in India is practically absent.
Commercial Risk
Commercial risk exists in any business ventures of a country. Not each
and every product or service is profitably accepted in the market. Hence
it is advisable to study the demand / supply condition for a particular
product or service before making any major investment. In India one can
avail the facilities of a large number of market research firms in
exchange of a professional fee to study the state of demand / supply for
any product. As it is entering the consumer market involves some kind of
gamble and hence involves commercial risk.
Risk of Foreign Sanctions
Due to the nuclear economic policy of India and its Missile Development
programme, India did not enjoy a favorable economic position in the eyes
of America. America's soft policy towards Pakistan in times of wars
fought between India and the neighboring nation was also a reason for
the strained relations between the two nations. In the cold-war era
India's closeness to the Soviet nation also harmed the relationship
between the two great democracies of the world. However, US President
Bill Clinton's state visit to India in 2000 was a turning point which
did wonders in reframing the economic policy of America towards India.
Subsequent to the visit by President Bill Clinton, visits between the
two countries at different levels took place, and the US government has
come to terms with the truth of a nuclear-armed India.
Background to the sanctions
The American nation had imposed some sanctions against India because of
its nuclear tests held in May 1998 at Pokharan. These sanctions however
remained on paper and were relaxed within months of their imposition.
Given the fact that US foreign policy in the post cold war era is
dictated by its economic interests, it anyway seemed most unlikely that
Iraq or Libya-type sanctions would ever be imposed on India. India is
greatly self-reliant in terms of basic technology and requirements,
hence the threat of sanctions could not deter the strong economic
nation. The United States perhaps the clearly understands this fact and
is a witness to India's surging economy and hence no major sanctions
have been imposed on the strong democratic nation.
In spite of how strong the threat of sanctions were, the President Bill
Clinton's visit to India laid to rest all doubts. In fact, the United
States has often referred to India as a great potential trading partner
as well as a strong political ally in Asia. With the United States
acquiring the role of the world's policeman a role which is not
appreciated by India and other countries - notably Japan and Australia;
the latter nations have toned down their opposition to India's nuclear
weapons programme. Overall the threat of foreign sanctions to India is
therefore of notional and speculative nature.
