Sovereign Risk
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.
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
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.
Risk 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 bit on an elephant.
The threat of foreign sanctions is therefore of academic and speculative
value.