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Jan 17, 2017

Unpacking the Risks of Doing Business in India

Namit Agarwal

The World Economic Forum recently published its annual Global Risks Report for 2017. This report is based on a global perception survey covering various age groups, countries and sectors such as business, academia, civil society and government. This report highlights risks of highest concern for doing business. A quick analysis of the 2017 risks for doing business shows that while the top global risks have largely remained stable there have been some significant changes in the context of India. Here’s what I observed.


Catching up with global risk perception

Results of the perception survey for India are more aligned with the global perception unlike previous year. Three risks – profound social instability, failure of national governance and unemployment or underemployment have seen the most significant change.

Profound social instability is associated with prominent social movements or protests that disrupt political or social stability, negatively impacting populations and economic activity. In 2016 this risk did not even make it to the top 25 in the India survey. It has come a long way to rank 2nd in 2017. Its global rank has remained unchanged at 5.

Failure of national governance is a risk associated with the inability to govern a nation of geopolitical importance as a result of weak rule of law, corruption or political deadlock. This has jumped to the 6th position from 24th in 2016. Its global rank has remained unchanged at 4.

Unemployment and underemployment is associated with sustained high level of unemployment or underutilization of the productive capacity of the employed population. This was at rank 18 in 2016 and has moved to rank 2nd tying with profound social instability. It continues to remain the top most global risk for business. What’s surprising is the rate of change in perception for India level risks while the same at a global level did not change at all. In my earlier post on the 2016 report perturbed by this anomaly I had written that “either Indian businesses feel they are better prepared to mitigate these risks as compared to their global counterparts, or they feel that the Indian economy is immune to these risks.” I am happy that my assumptions stand corrected now!    


What went down?

Two risks which are now perceived to be much lower in the Indian context are in striking contrast with global perception. Failure of critical infrastructure which is associated with the failure to adequately invest in, upgrade and/or secure infrastructure networks (e.g. energy, transportation and communications), leading to pressure or a breakdown with system-wide implications. While globally this continues to stay at 8th position in India it has dropped from 6th place to 20th. Building India’s critical infrastructure is one of the top priorities for the government I feel it’s still an unrealised dream. India’s infrastructure deficit is costing upto 5% of the GDP and in my view continues to be a higher order risk. Fiscal crises which is associated with excessive debt burdens that generate sovereign debt crises and/or liquidity crises. While globally it is stable at 3rd position it has dropped from 2nd to 16th position in India. India’s total fiscal deficit is among the highest in G20 countries. RBI Governor recently made a public statement urging the government for better managing this risk. I am yet to find a very strong evidence in support of this drastic change in perception. 


Trends to watch out for

The report maps each risk with a set of trends that are inter-connected to it. Looking at the trends interconnected with the top India level risks the following common trends stand out. None of the trends look surprising or odd except the one on ageing population given India’s young median age.

  • Rising income and wealth disparity – This trend is connected most prominently to social instability and unemployment risks. Credit Suisse’s Global Wealth Report 2016 put India as the second most unequal country in the world. In India, the top 1% grew its share of the country’s wealth from almost 37% in 2000 to 53% in 2016. The fact that the top 2 perceived risks for Indian businesses are prominently linked to the alarming levels of inequality in India this is the most critical trend for Indian businesses to watch out for. 
  • Growing middle class in emerging economies – India’s middle-class population has doubled in size to 600 million between 2004 and 2012. India’s middle class population is poised to expand significantly and could potentially add over 1 billion people to the global middle class between now and 2039. Two most prominent risks interconnected with this trend are – failure of urban planning and unemployment. This poses a real threat in a scenario where fewer organised sector jobs are being created to come to speed with the growing demand from growing educated middle-class working age population. 

Growing middle class wave

 

  • Increasing national sentiment – This is a trend linked prominently with the risk of profound social instability and unemployment or underemployment among others. India is experiencing a surge in the nationalistic sentiment among its people. While the political merits and demerits of a nationalistic surge have been debated to death its impact on business risks is new. 

Increasing national sentiment

 

  • Rising urbanisation – This trend is interconnected with the risks of failure of urban planning, profound social instability, unemployment or underemployment, failure of critical infrastructure and water crises. World Bank estimates that India’s urban population will double to 857 million by 2050. This translates to building over 7.5 billion sq. ft of residential and commercial space every year for the next 15 years. The biggest challenge besides these audacious numbers is that this rapid urbanisation continues to promote spatial inequalities with the marginalised populations concentrated mostly within unauthorised and poor neighbourhoods. 

Namit Agarwal, Lead Specialist - Private Sector Engagement, Oxfam India

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