Political Environment of Business in India

The following aspects of political environment may be considered as its critical elements in
relation to business:

1. Political System
2. Political Processes
3. Stability of Political Structure
4. Centre-State Relations

Element 1 - Political System:

Indian Political system is governed by the constitution of India which was moved by Pandit
Jawaharlal Nehru on 9 December 1946 and was subsequently adopted by Constituent Assembly
in Jan. 1947 and came into force on 26 th Jan. 1950. The constitution of Indian republic is not
the product of political revolution but of research of eminent people who made an effort to
improve upon the existing system. President of India is the head of Indian Union and has to act
in accordance with the advice of Prime Minister of India and council of ministers.
The supreme legislative body of Indian Union is the Parliament consisting of two
houses:

(a) Lok Sabha (House of People) and

(b) Rajya Sabha (Council of States)

Members of Lok Sabha are chosen by direct election for a term of five years.
Members of Rajya Sabha are indirectly chosen and are the elected members of legislative
assemblies of state.

Few members are also nominated by the president. One third members retire every year.

States have:

(a) Legislative assemblies (Vidhan Sabha).

(b) Legislative councils (Vidhan Parishad). Not all states have Vidhan Parishad.

Union Territories have Administrator who is appointed by President.

Local Government in urban areas instead has elected municipal bodies.

Element 2 - Political Processes:

Election Commission of India is an independent authority which governs the formation and
functioning of political parties at national, regional and state levels. The law provides for
registration of political parties by Election Commission. The state or government cannot give
preference to one religion as against another.
The word ‘Secular’ was inserted in the Preamble by 42 nd Amendment to the constitution in 1976
which means according equal encouragement to all religions. But national leaders lay emphasis
on problems focused in the light of their interest during elections. Rather they have been taking
up the issues like – problems of backward classes, rural upliftment, alleviation of poverty etc.

Element 3 - Stability of the Political Structure:

Balance between executive, legislation and judiciary can lead to stable political structure. In
India, ministry departments, secretariats and offices have executive power at centre and state.
Comptroller and Auditor General (CAG) are appointed by president and have to report on
account of Union and States to the President and respective Governors. Local leadership at
times leads to political instability as a result of their vested interests. One such instability has
resulted in reorganization of states by bringing out amendments in constitution. One result of
such reorganization is Uttaranchal, Jharkhand and Chhattisgarh.

Element 4 - Centre-State Relations:

To avoid conflict between Union and federating states the constitution has provided for three
fold distribution of power; i.e. – Union, state and concurrent.
Only central government can make policies on the subjects included in ‘Union’ list. Only state
government has power to make policies on the subjects included in ‘State’ list. But both centre
and state governments can make policies on subjects in ‘concurrent’ list. President’s rule can be
imposed under Article 356 and it also provides for dissolution of state assembly in case of
failure of constitutional machinery in the states. The constitution also specifies centre state
relation with respect to –
(a) Distribution of financial powers between centre and state and
(b) Mechanism of resource transfer from centre to states

Economic Overview

The Indian economy has held up better than other emerging countries to the global economic
slowdown and has benefited from low oil prices in recent years. The country's economic growth
was dynamic (7.5% GDP), stimulated by public spending. The figures are nevertheless to be
taken with a grain of salt, because the new method of calculation of the GDP could inflate the
country's performance. Activity slowed down slightly at the end of fiscal year 2016/17, due to
surprise measures announced by the Modi administration. Growth should accelerate in 2018,
sustained by a rebound in consumption.

In 2016, Prime Minister Narendra Modi continued his programme of reforms aimed at
consolidating public accounts, promoting investment and industrial development and improving
the business climate. Despite a downward trend, the government deficit (6.7% GDP) and debt
(68.5% of GDP) remain high. Private investment slowed in the first half of the year, and growth
was mainly driven by government spending. In August 2016, a single federal VAT in lieu of
multiple taxes was voted, but its application has so far been the source of more complications.
In November, Prime Minister Modi decided, without any previous notice, to demonetize some of
the banknotes in circulation in order to reduce the burden of the informal economy, creating a
degree of chaos. This caused a shortage of money, the supply was disrupted and consumption
declined. The 2017 budget is still favourable to the market and aims to support growth, while
providing for a reduction in the public deficit. In 2016, relations with Pakistan deteriorated after
an attack on an Indian base in the state of Punjab in January and an attack on an Indian base
 by a group of rebels in September, against which the Government retaliated. Modi is
increasingly criticised for his authoritarian style of governance tinged with Hindu nationalism.

India is still a poor country: it continues to suffer from a low GDP per capita, almost 25% of the
population still lives below the poverty line and the country's inequalities are very strong. Half
of the children under five years of age suffer from malnutrition. Unemployment affects around
7% of the workforce.
 

Main Indicators 2014 2015 2016 2017 2018 (e)

GDP (billions USD) 2,033.65 2,088.16 2,256.40 2,454.46 2,685.70

GDP (Constant Prices, 7.2 7.9 6.8 7.2 7.7

Annual % Change)

GDP per 1,594e 1,616e 1,723e 1,850e 1,998

Capita (USD)

General -7.0 -7.0 -6.5 -6.4e -6.3

Government
Balance (in % of
GDP)

General 68.6 69.6 69.5 67.8e 66.1

Government
Gross Debt (in % of
GDP)

Inflation Rate (%) 5.9 4.9 4.9 4.8 5.1

Current -26.79 -22.09 -20.86 -36.51 -41.54

Account (billions
USD)

Current -1.3 -1.1 -0.9 -1.5 -1.5

Account (in % of
GDP)

Source: IMF – World Economic Outlook Database, 2017

Note: (e) Estimated Data

 
 Main Sectors of Industry

India is the world's fourth agricultural power. Agriculture contributes 17% of the GDP and
employs nearly 50% of the active population. This share has diminished in recent years while
its contribution to the GDP has increased. The main agricultural products are wheat, millet, rice,
corn, sugar cane, tea, potatoes and cotton. India is also the second largest producer of cattle,
the third largest producer of sheep and the fourth largest in fishing production in the world. 

Coal is the country's main energy source (India is the world's third largest producer of coal). In
the manufacturing industry, textile plays a predominant role. In terms of size, the chemical
industry is the second largest industrial sector. The industry sector employs one-fifth of the
workforce and contributes slightly under 30% of the GDP.

The services sector is the most dynamic part of the Indian economy. It contributes to 53% of
its GDP and it only employs slightly over one-fourth of its workforce. Its contribution to the GDP
has recently been declining. The rapidly growing software sector has been boosting the export
of services and modernising the Indian economy.
 

Breakdown of Economic Agriculture Industry Services

Activity By Sector

Employment By Sector (in 44.3 24.5 31.2

% of Total Employment)

Value Added (in % of GDP) 17.4 28.8 53.8

Value Added (Annual % 4.9 5.6 7.7

Change)

Source: World Bank, 2016