Financing Foreign Trade

India Trade

The Risk of Trade With India

Primary Concerns:

Over the course of the last decade, the once stagnant Indian economy had become among the fastest growing in the global community. The opening doors of free trade have made India a top destination for high-tech companies, a major service industry provider and host to countless foreign trade and production endeavors. However, just as its fortunes have improved with the proliferation of globalization, so too have its recent fortunes felt the decline of the global recession. As reported in an article from Businessline, Chennai, "due to the difficult financing conditions prevailing in the international credit markets and increased risk aversion by the lending counterparties, gross inflows of short-term trade credit to India declined in 2008-09 and this trend continued in 2009-10." (Anonymous, p. 1)

Still, India remains an economy rife with growth potential for foreign investors. An important factor in this environment, however, is management risk. Today, the opportunities possible in the developing economy are counterbalanced by no small degree of difficulty. As in most developing countries, the market controls that will ultimately come with true achievement of 'developed' status are still a nu mber of years away. As a result, one must risk the perils of an underdeveloped market, which include a great deal of impropriety and unpredictability.

This finding is supported in an article by Gill et al. (2010), which surveys the experiences of a number of Canadian businesspersons invested in endeavors in India. Their various experiences help lend credence to the concern that foreign investors face an especially high risk of exploitation. Accordingly, the article by Gill et al. (2010) points out that "the findings suggest that perceptions of the political and legal nature, corruption, confiscation, and economic risk can hinder investments and may lead to capital losses on investments in the Indian real estate market." (p. 1)

Indeed, the research indicates that one of the biggest obstacles to achieving the anticipated gains in the Indian market actually has less to do with the downturn in the global economy than with an array of challenges specific to India or, at least, to the developing sphere. For any foreign companies seeking to invest and expand in Indian markets, it must be with designs to insulate and protect against the many forces that might otherwise undermine their objectives.

Minimizing the Risk:

On the surface, these factors combine to render a rather unfavorable view of conducting foreign trade or investment in India. However, this is somewhat misleading, or at least only conveys a small part of the picture. In reality, outside the scope of the current recession, India does remain one of the most promising growth states in its region.

This is confirmed in the article produced by Businessline, which suggests that a focus on short-term credit strategies might be a good way to mitigate the dangers presented by long-term investment in India. According to the article, there has also been some traction in bringing a more positive regulatory environment to the fore. The article indicates that "the various policy initiatives taken by the Government and the RBI helped ease the pressure on trade financing. This is corroborated by the increase in share of short-term trade credit (both inflows and outflows) in the overall gross capital flows." (Anonymous, p. 1)

This suggests that short-term trade credit might be an effective way to at least minimize one's financial exposure to risk. In addition to this recommendation, Gill et al. offer several suggestions that are not only instructive towards minimizing risk but also lend great insight into the way that the Indian marketplace conducts itself. Gill et al. recommend that foreign companies setting up operations in India take a number of steps to connect themselves to the local community and its attendant business culture. This includes such actions as hiring local employees, borrowing local funds, financing through local banks, establishing good relationships with local lenders and, perhaps most importantly, establishing good relationships with local and national politicians. These steps indicate that companies which integrate themselves more directly into their communities and regions will be less likely to face undue government intrusion, confiscation or other corrupt antagonism.