Indian policies continue to make foreign investments in India more attractive to make economic growth robust. Policy drive in the Centre is to make India a USD5 trillion economy by 2024. The policy also aims to continue making ease of doing business more attractive with competitive and fair business practices by further digitizing the economy, and improving infrastructure, logistics and networks to promote manufacturing activities. While the Government of India and other agencies are in attempt to make operations smooth and glitches-free, the key challenges for these agencies would be to manage existing risks, identify emerging threats, and design a framework to have an action plan in place when continuity becomes a casualty.
This study aims to allow businesses to develop a 360-degree risk management strategy to assist companies in preparing against any contingency, that will help companies mitigate disruption and hedge against any concerns pre-emptively.
This survey uses Pinkerton Risk Wheel framework to understand and assess each risk individually and also to look at them for a holistic analyses. There are four risk categories in the Pinkerton Risk Wheel – based on the nature of threats. Some of these risks listed under each category are interconnected to each quadrant.
The four quadrants in the risk wheel are – Hazard & Event Risk (natural hazards, crime, terrorism & insurgency, and fire), Operational and Physical Risk (strikes, closures & unrest, threats to women safety and accidents), Market and Economic Risk (corruption, bribery & corporate fraud, and political and governance instability), and Technology and Information Risk (business espionage, information and cyber insecurity, and intellectual property theft).
INDIA RISKS
India Risk Survey 2019 identifies the most significant threat types within each risk for mitigation and holistic management. The threats highlighted in this study are interconnected and overlap across domains, sectors and geographies.
Corruption, Bribery & Corporate Fraud
Corruption, Bribery & Fraud climbs up in the risk chart to the top position in the India Risk Survey 2019. It includes bribery/ kickback, conflict of interest, shell companies, business identity theft, and others. Among these, bribery/ kickback has emerged as the biggest threat. A series of high-profile fraud cases have been reported affecting the banking sector in the past two years. While the Government has initiated a series of crackdowns on corrupt officials and shell companies and made regulatory changes, India has not significantly improved its position in the Transparency International Corruption Perceptions Index in the past three years.
Natural Hazards
Natural Hazards remains at the second most significant risk to business operations for two successive years. In 2019, floods continued to disrupt business operations and hence remained a potent threat under this risk category. Persistent improvement in early warning systems and preparation to deal with natural hazards would be required. During natural calamities, business operations also get affected due to inadequate infrastructure and maintenance by concerned bodies.
“Businesses operate in a complex environment wherein the nature of risks is ever changing. India’s business environment is also transitioning through regulatory changes, adoption of new business practices, and evolution of technologies at a rapid pace. All these changes are aimed at making India an attractive business ecosystem and investment destination. This also calls for quick action and collaboration between both public as well as private sector to help protect businesses against the identified risks.
India Risk Survey attempts to assess business threats and aims to serve as a useful guide for policy makers and business leaders to mitigate these identified risks. Pinkerton adopts a comprehensive risk management approach, relying on data and new tools like Artificial Intelligence and so, to anticipate risks and gauge their impacts before recommending mitigation measures. The purpose of the report is to engage with all stakeholders including policy makers and business leaders to connect and collaborate in anticipating risks and mitigating them in a timely manner”
-Rohit Karnatak
Managing Director – India APAC & EMEA – Global Screening, Pinkerton
Crime
Crime risk category moves up in rankings to the third most eminent risk. Offences against public tranquility have emerged as the topmost threat to the private and public sectors under this risk category. White collar crime also poses a direct threat to companies’ finances and brand reputation.
Political & Governance Instability
Political & Governance Instability ranks fourth in the India Risk Survey 2019. The survey finds that policy changes are perceived as a threat under this risk category. Following the general elections in 2019, the Government at the centre with a strong mandate, is expected to continue with market reforms, and changes in regulations is on the cards. Businesses can expect reforms and change in rules in the near to medium term, which could impact the business ecosystem and particular sectors of the economy.
“During 2019, India’s macroeconomic risks moved into sharper focus. Financial market volatility increased and the headwinds facing Indian economy intensified. Though the growth of Indian economy moderated in 2018-19 with a growth of 6.8 % – slightly lower than 7.2 % in 2017-18, yet India continued to be one of the fastest growing economies in the world. To achieve the objective of becoming a USD 5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8%.
At the same time, Indian businesses are facing a growing number of complex and interconnected challenges – from slowing growth and persistent economic inequality to non-financial risks such as climate change, geopolitical tensions and the accelerating pace of the fourth industrial revolution. This report aims to measure and quantify the different risks that businesses face when conducting operations in India. It is not just producing a risk ranking, but more interestingly, analyzing the changing perception of industry with shift in macro and micro economic factors and government policies”
– Rahul Chaudhry
Chair- FICCI Committee on Homeland Security
Terrorism and Insurgency
Risks emanating from Terrorism and Insurgency show a significant drop to the fifth position in the Indian Risk Survey 2019. This highlights a reduction in terror and Left Wing Extremism-related activities since 2018. The use of explosives is the most prevalent threat type under this risk category. While the activities of the Islamic State (IS) have mostly been contained globally still they pose threat to the public as well as to businesses. The Government of India continues to push for holistic efforts to counter the threats of terrorism and insurgency, at internal as well as external levels.
Information & Cyber Insecurity
Information & Cyber Insecurity moves down to the sixth position in the Indian Risk survey index this year. In this risk category, data theft, compliance and regulatory incidents, cyber infrastructure attacks, and impersonations are the four main concerns for companies. For businesses, data theft, phishing, and hacktivism remain the most significant threat. The government and companies are building safety nets; however, this risk remains due to the sophisticated nature of attacks and the unpredictable nature of the attacker.
Intellectual Property Theft
Risks associated with Intellectual Property (IP) theft moves up in the India Risk Survey 2019 to the seventh position. Under this risk category, brand reputation loss has emerged as the biggest threat to companies. While policymakers are aligning business practices following international norms, companies should continue to enhance research and development and spread awareness within the sector about IP and IP-related issues.
Business Espionage
Business Espionage moves one rank up in India Risk Survey 2019 to the eighth position. Companies find employee poaching most prevalent threat under this risk category. Businesses dealing with sensitive data, particularly in the cyber-domain, are more vulnerable to sophisticated and covert activities. Companies find the detection and mitigation of such subversive activities challenging.
Strikes, Closures and Unrests
Strikes, Closures and Unrests occupy the ninth position. Union/ labour union strikes remain the most significant threat to business operations. Amidst recent economic slowdown and proposed talks of labour reforms and other economic reforms, unions adversely affected with such changes are likely to stage protests in near to medium-term. Businesses can have an impact if violence erupts during strikes and closures. Companies can incur financial losses if these actions affect business operations.
Fire
Fire outbreaks continue to pose risks to business continuity and operations. In the India Risk Survey 2019, incidents related to fire outbreaks slip to the tenth position. In the current year, significant events of fire outbreaks have been reported from different parts of the country, causing loss of life and property. Companies would need to diligently follow the regulatory authorities’ prescribed norms of fire safety measures and implement them. In addition to that, training of employees and citizens in spreading awareness about safety measures is critical.
Accidents
In the India Risk Survey 2019, accidents remains in the eleventh position, like last year. The study finds that businesses rank traffic accidents as the most significant threat within the risk. According to the government published data, 1.5 lakh people have been killed in road accidents in 2017. About 36 percent of these fatalities are reported from national highways. Businesses have a direct liability if there are any accidents at the workplace. Companies need to reduce occupational accidents as they can impact operations, lower productivity, lower sales, and possible disrupted business continuity.
Threats to Women Safety
Threats to women safety occupy the twelfth rank in the India Risk Survey 2019. Companies/ employers are primarily responsible for providing a safe workplace for women employees and the prevention of sexual harassment in the workplace. Corporates, in their own best interests, continue to streamline and strengthen their internal policies on sexual harassment.
FACTORS INFLUENCING THE RISK GAINERS
Corruption, Bribery & Corporate Frauds
Trends
Following a series of high profile corruption and corporate fraud cases, respondents have voted for Corruption, Bribery & Corporate Fraud as the top disruptive concern for business. This is a sharp rise from the eighth position in the Indian Risk Survey 2018. Over 2018-2019, several high profile cases of corruption and fraud have been under investigation. The latest annual report by RBI states that bank frauds have gone up by 74 percent to INR71,543 crores in the financial year 2018-19.
Threat mapping
Despite India improving its rank at Transparency International’s Corruption Perceptions and other indexes, reports of corruption, bribery and fraud can cause damage to India’s business ecosystem. According to reports, the former COO of a top IT conglomerate was directed by the US market regulator Securities and Exchange Commission (SEC) to pay a $50,000 (INR35 lakh) penalty in a bribery case. The then COO of the US-based company had paid USD2 million to an Indian official for securing necessary permits for constructing a commercial office in Chennai.
Promoters of the HDIL Group (a real estate development company), the main accused in the INR6500 crore Punjab and Maharastra Cooperative Bank (PMC) fraud case, are reported to have paid kickback to PMC official for sanctioning for loans.
Such cases affect the business ecosystem in a negative way. Despite government efforts, the risk itself continues to be a hindrance to business in India and impedes the ability to maintain leverage in a competitive environment.
Impact and Combat
According to a report in 2016, the World Economic Forum cited that corruption remains a significant barrier to growth in India. Transparency International cited that despite spectacular public mobilization in 2011, where citizens demanded the government to take action against corruption and advocated for the passage of the comprehensive Jan Lokpal Act, these efforts ultimately fizzled and fell flat, with little to no movement on the ground to build the specialist anti-corruption infrastructure required.
Another report ‘People and Corruption’ found that seven in 10 people in India paid bribe to access public services, while conducted an extensive survey. India was tagged with 69 per cent corruption rate despite people feel that the government is taking a lot of measures to curb corruption. And there are several such reports. An unregulated environment can dissuade potential investors and diminish the growth opportunities of existing players.
Businesses have called for enhanced corporate governance and stricter regulation to make transactions more transparent and regulated. The government, to check corruption, has implemented specific measures such as:
- The definition of ‘public servant’ now includes officials employed at private banks, making them liable for prosecution.
- As part of a crackdown on corruption, 22 senior government officials have been retired in August 2019 following charges of misdoings against them. The central government has written to the state governments to take similar action against tainted state officials.
- Corruption by public officials is treated as criminal misconduct.
- The maximum punishment for corruption has been increased from five years to seven years.
- Overall, India has displayed a definite trend towards reducing corruption, bribery and corporate fraud. However, it persists as a significant threat to the Indian economy and polity, pervading the public and private sectors alike.
Intellectual Property Theft
Trends
Intellectual Property Theft climbs up from twelfth position in 2018 to seventh position in this year’s survey. Subject matter experts believe that minimal IPR awareness among persons, R&D, and educational institutes and businesses should be spread. The government and private sector continue to foster diplomatic ties on bilateral and multilateral platforms to resolve IPR issues. It is also important to note that thorough employee background check aids in avoiding industrial/ business espionage relating to IP theft.
Threat mapping
According to the Authentication Solution Provider’s Association (ASPA), an association that provides solutions for brand, revenue and document protection, India’s counterfeit market causes a loss of INR1 trillion to companies every year. The pharmaceutical industry is most impacted by counterfeiting. The government also ends up losing revenue. For companies, it is not just a loss of income, but also a brand loss.
As per a case study by the Organisation for Economic Cooperation and Development (OECD), India, along with other South Asian countries has emerged as strong suppliers of counterfeit goods.
Government and companies would need to work in spreading awareness about IPR and strengthen internal controls to protect against IP theft.
Impact and Combat
To crack down on the organized sale of counterfeit goods, the government would need to make offences committed against the Trademark Act and Copyrights Act cognizable and non-bailable, as enshrined in the provisions of the Indian Penal Code.
To spread awareness about IPR, the Department for Promotion of Industry and Internal Trade (DPIIT) has launched ‘L2Pro,’ India IP e-learning platform and the L2Pro India Mobile App in October 2019, where information on securing innovation and intellectual property rights is readily available. This legal aid is likely to help small companies and startups, to innovate and protect their products.
Following an amendment to India’s Patent Act in 2005, India is now compliant with international norms – the Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The government is also trying for R&D institutes to meet with industrial needs and requirements. It also needs to increase spending on R&D to compete in the global market. In 2016-17, India spent just about 0.7 percent of its GDP on R&D, compared to Japan, US, and China, which spent about 3.2 percent, 2.8 percent, and 2.1 percent respectively, in 2017. Companies would also need to change their approach towards IPR. Many companies tend to see patents as a cost center.
The government continues to strengthen collaboration and a deeper understanding of bilateral and multilateral norms on IPR issues and their compliance. Businesses are advised to spread awareness about the patents regime and comply with it, which will allow continuity of existing inflow and outflow of trade and investments. To mitigate IP related risks employees must be screened to avoid industrial/ business espionage relating to IP theft.
Crime
Trends
Risks posed by criminal activities climbed to third position in the India Risk Survey 2019 as compared to India Risk Survey 2018 ranking at seventh position. India is ranked 141 out of 163 countries in the Global Peace Index, 2019, slipping from 136th ranks in 2018.
As per the National Crime Bureau Report (NCRB), 2017, while there were 4.29 lakh cases of violent crime in 2016 NCRB, in 2017, such incidents have only marginally fallen to 4.27 lakhs.
Impact and Combat
The risk of crime poses a serious concern for organizations and companies in India, affecting perceptions, and hampering global business interests. In July 2019, the German Consul General in Mumbai had flagged the fears of German companies facing concern over rising pressure from labour unions and anti-social elements creating problems near the businesses. There were reports that affected companies might relocate to Shanghai, China but chose to stay after the Maharashtra government assured them that they would look into the issue.
Many state police departments have started monitoring CCTV footage 24×7 in command & control centers.
In addition to that, NCRB is looking into use of artificial intelligence for facial recognition to help crack criminal cases. The Bureau is also working to integrate fingerprint data under the National Automated Fingerprint Identification System (NAFIS) program with Crime and Criminal Tracking Network & Systems (CCTNS).
Furthermore, white-collar crime has impacted business profitability. Businesses should adopt risk mitigation strategies, with internal and / or independent external support, and treat this as an investment to prevent financial losses.
OTHER RISKS
In the 2019 edition, new risks have been identified based on this year’s review, which includes – Governance & Regulatory Risks, Risk of Non-compliance to Data Privacy Laws, and Risk of Impact on Business due to Climate Change. If these risks had to be plotted on a scale of 1-12, Governance & Regulatory Risk would rank the highest followed by Risk of Non-Compliance to Data Privacy in the second position and Risk of Impact on Business due to Climate Change in the third position.
Governance & Regulatory Risks
Governance & Regulatory risk arises from a change in regulations and laws that might affect an industry or a business. It can impact the ease of doing business in the country. Such changes in regulations can have a significant impact on the industries in the short and medium-term, can imply changes in cost structure, and can influence change in business models etc. Companies might have to bring in place a dedicated team to interpret, analyze and implement new changes. Change in governance and rules can create an environment of ambiguity in the interpretation, new compliance issues, and can make the business environment more bureaucratic.
According to a survey in 2019, Indian business leaders, along with their counterparts in China, Japan, Australia and Malaysia, anticipate that change in business regulation is likely to make ease of doing business complex in the coming years.
Policymakers in India since 1991 are trying to make the business environment liberal, fair, pro-competition, corruption-free, transparent and responsible. In recent years the term ‘governance’ has been expanded to cover more issues, and companies would be expected to comply with such regulations. Some of the policies that have created much buzz in corporate boardrooms are SEBI changes to governance policy on the lines of Kotak Committee Report, Ministry of Corporate Affairs has issued National Guidelines on Responsible Business Conduct. Recent trends also indicate that directors will be held personally responsible for the company’s wrongdoings.
With a series of frauds and misgovernance reported in the banking sector and other companies in the last two years, it might prompt the government to bring more regulations to check such misdoings.
Indian corporates, boards and promoters will have to embrace change and equip boardrooms to implement changes and the amendments.
Risk of Non-compliance to Data Privacy Laws
Former Supreme Court Judge – Justice BN Srikrishna committee submitted a report on data protection in July 2018, called draft Personal Data Protection Bill. This bill is likely to be tabled in the Parliament in the upcoming winter session in 2019. The draft talks about data protection and privacy on the same lines as the European Union’s General Data Protection Regulation (GDPR). The bill imposes restrictions on how personal data is collected and stored by businesses or any other agencies. The bill also restricts the transfer of local data offshore and recommends a setting of Data Protection Authority of India to check any violations of data protection. Penalties are recommended on entities, including businesses, for non-compliance in this draft.
Major businesses have pledged to guard the privacy of people’s data and have spoken about their concerns about this bill. IT companies, e-commerce, Fin Tech companies are likely to face challenges about data localization. Generally, the cost to the company is expected to go up, as companies would require to spread awareness about data protection and how data is collected and stored within the company. Many businesses that operate in the European Union region have already taken steps to comply with GDPR.
Risk of Impact to Business due to Climate Change
The severe weather pattern, reports highlighting human activities degrading environment, constant campaigns by civil societies, and UN framework to protect the environment and promote sustainability have already set changes in the Indian business environment. In the near and medium-term, businesses can expect more green laws. Courts and Green Tribunals are likely to question practices that are viewed as damaging to the environment.
Severe weather patterns like flooding and drought disrupt businesses and cause human, capital and financial loss. The availability of resources might get impacted. For instance, agro-businesses will have an impact on continuity if agricultural produce gets destroyed due to weather patterns. The Economic Survey 2017-2018 had warned that climate change might reduce farm produce by 20-25 percent.
The cost of businesses might go up in such adversities. Manufacturing hub and IT city Chennai’s swing between excessive rains and prolonged dry spells and consequent water crisis this year shows vulnerability towards changing weather patterns. Businesses were disrupted in June 2019 after Chennai reported that all its water reservoirs have dried up.
Plastic manufacturing businesses have sought clarity from the government on phasing out single-use plastic by 2022. The government would require to define what all is included in single-use plastic. The government revised its decision to impose a nationwide single-use plastic ban from October 2019. Due to uncertainty over the policy, as many as 10,000 plastic manufacturing units are facing a shutdown, and 4.5 lakh workers might lose jobs.
