India is a vibrant parliamentary democracy and has been one
since its political independence from British rule more than
50 years ago. There is no serious revolutionary movement in
India; hence there is no conceivable possibility of the state
collapsing. Sovereign Risk in India is therefore zero for
both "foreign direct investment" and "foreign
portfolio investment." It is however advisable to avoid
investing in the extreme north-eastern parts of India because
of terrorist threats. Kashmir in the northern tip is also
a troubled area, but investment opportunities in Kashmir are
anyway restricted by law.
2) Political Risk
India suffered political instability for a few
years due to the failure of any party to win an absolute majority
in Parliament. However, political stability has returned since
the previous general elections in 1999. However, political
instability did not change India's economic course though
it delayed certain decisions relating to the economy.
The political divide in India is not one of policy, but essentially
of personalities. Economic liberalisation (which is what foreign
investors are interested in) has been accepted as a necessity
by all parties including the Communist Party of India (Marxist).
Thus, political instability in India, in practical terms,
posed no risk to foreign direct investors because no policy
framed by a past government has been reversed by any successive
government so far. You can find a comparison in Italy which
has had some 45 governments in 50 years, yet overall economic
policy remains unchanged. Even if political instability is
to return in the future, chances of a reversal in economic
policy are next to nil.
As for terrorism, no terrorist outfit is strong enough to
disturb the state. Except for Kashmir in the north and parts
of the north-east, terrorist activity is either non-existent
or too weak to be of any significance. It would take an extreme
stretching of the imagination to visualise a Bangladesh-type
state-disrupting revolution in India or a Kuwait-type annexation
of India by a foreign power.
Hence, political risk in India is practically non-existent.
Commercial risk exists in business in any country.
Not each and every product or service can be readily sold,
hence it is necessary to study the demand/supply situation
for a particular product or service before making any major
investment. There is a large number of market research firms
in India (including our own) which will study demand/supply
situation for any product/service and advise the potential
investor accordingly in exchange of a professional fee. The
IndiaOneStop website provides some accurate statistics and
insights into the most viable sectors for foreign direct investments.
You can view these studies at http://www.indiaonestop.com/fdilink.htm
of Foreign Sanctions
India did not seem to be in the good books of the
United States government due to its nuclear weapons and missiles
development policy. However, US President Bill Clinton's state
visit to India in 2000 was a massive hit which even saw the
President dancing with a crowd of colorfully dressed women
in the northwestern state of Rajasthan. Subsequent to the
visit, visits between the two countries at different levels
took place, and the US government has all but come to terms
with the reality of a nuclear-armed India.
Background to the sanctions: The US had imposed some
sanctions against India because of its nuclear tests in May
1998. But these sanctions have been theoretical and even such
theoretical sanctions 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 highly self-sufficient in terms
of basic technology and requirements, hence the threat sanctions
could not bring India to its knees. The United States seems
to understand this which is perhaps why it never went ahead
with really biting sanctions against India.
Regardless of how strong the threat of sanctions were, the
US President's above-mentioned state visit to India has laid
to rest all doubts. In fact, the United States has often referred
to India as a great potential trading partner as well as,
perhaps, a politically strategic partner in Asia. India's
rapidly improving relations with Israel has only lent further
momentum to India-US bonding.
Given the fact that the United States has somehow managed
for itself the role of the world's policeman (a role to which
India is explicitly opposed), other countries – notably Japan
and Australia – have also toned down their opposition to India's
nuclear weapons programme. In other words, it is now business
as usual for the world vis-à-vis India.
It is however theoretically possible that relations with the
United States can go sour again in the future. If that happens,
India's sheer self-sufficiency in all matters except in the
not-so-critical cutting edge technologies, will ensure that
no sanction will hurt more than a mosquito bite on an elephant.
The threat of foreign sanctions is therefore of academic and