COUNTRY RISK ANALYSIS PROJECT

Investments by a Chinese Firm

in the Automobile Sector in India

GROUP 3
Mayank Pawar 0193/56 Political Risks – Based on The BERI Index Variables
Pratik Gandhi 0046/56 Economic Risk Assessment – Based on ICRG Index
Variables
Shikhar Singhi 0062/56 Legal and Regulatory Risks of Doing Business in India
Shourya Umang 0065/56 Modes of Investment – Based on Identified Risks
Shreyansh Sharma 0225/56 Scenario Analysis
Mohammed Raashid 0444/56 Risk Mitigation Strategies
Table of Contents
I. Political Risks – Based on The BERI Index Variables ..................................................... 2
II. Economic Risk Assessment – Based on ICRG Index Variables ....................................... 7
III. Legal and Regulatory Risks of Doing Business in India............................................... 12
IV. Modes of Investment – Based on Identified Risks ..................................................... 17
V. Scenario Analysis ...................................................................................................... 22
VI. Risk Mitigation Strategies......................................................................................... 27

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I. Political Risks – Based on The BERI Index Variables
By: - Mayank Pawar (0193/56)

1. Fractionalization of the Political Spectrum

India is a parliamentary democracy consisting of the Lok Sabha (the lower house) and the
Rajya Sabha (the upper house). The Prime Minister is the chief of the Government leading
the Council of Ministers as a part of the Central Government. Additionally, India has a
Federal structure where all the states choose their Chief Ministers. The multi-party
democracy system of the country enables the formation of coalitions to establish
governments. Currently, however, the Central Government is led by PM Narendra Modi
who enjoys absolute majority with 303 Member of Parliament from his party, the BJP. He
also heads the National Democratic Alliance, a coalition, which has the support of 336
MPs. This is Narendra Modi's second term as Prime Minister where he is heading a very
politically stable government at the centre. The last elections concluded in 2019, and he
is on his way to complete another full term of 5 years with next elections in 2024.

Mr Modi is perceived to be a strong leader & the Prime Minister's Office is the only power
centre in the Government, which is essential to note from an investment point of view.

Risk Evaluation
The present government is pro-business in its stance and has made significant moves like
cutting down corporate tax rates to attract investment. The government is stable at the
centre, and even if the opposition comes into power after the next elections, we don't
expect that stance to change much. (Low Risk)

2. Fractionalization due to Language, Race, or Religion

India is one of the most diverse nations on the planet in terms of religion and ethnicity.
According to the 2011 census, India has 78.35% Hindus, 14.2% Muslim population, 2.34%
Christian and 1.72% Sikh population and the rest is comprised of other minorities which
include Buddhists and Jains. Due to historical hostility, there have been skirmishes and
insurgencies in the past. However, using diplomatic or military action, India has managed
to control it. The northernmost region of Kashmir though remains a hotbed for militancy
and insurgency. Article 370, which granted special rights to this state was revoked in
2019, and since then the entire region is under curfew. The Internet has been shut down,
and there are severe restrictions on the movement of people.

It is estimated that by 2025 India will have the highest number of English speakers in the
world. Having an abundance of English speakers is a positive sign with respect to business
and investment.

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 Risk Evaluation
India is a thriving democracy and a secular republic as declared in its constitution. In 1959
the Chinese aggression into Tibet led to the Dalai Lama feeling Tibet and seeking refuge
in India. Owing to its commitment to peace and secularism, Dalai Lama was given asylum
in India which soured the Sino-Indian relations. This was also one of the reasons which
led to the Indo-Chinese War of 1962. These two topics still create tremors of tension
between the two countries. Unlike China, India is not a homogenous entity, and there is
a massive cultural difference. (Low Risk)

3. Restrictive Measures to Retain Power

India has a right-wing nationalist party - 'Bhartiya Janata Party' in power since 2014. The
party won above 250 seats in 2014 and bettered that tally by winning over 300 seats in
2019 both of which were free and fair democratically held elections. There have been no
'major' legislations that have been passed to retain power. Having said that arrests of
several activists and the dilution of the revolutionary 'Right to Information' Act which
increases transparency in the system have resulted in warnings from several quarters.
India continues to be a full-fledged democracy with free and fair elections throughout
the country.

Risk Evaluation
Even though there has not been any legislation passed to retain and hold power directly,
some legislations have been used as a proxy for this measure. This is a tricky one to
evaluate since India still is a thriving democracy; however, the total concentration of
power in the hands of a few can be risky in the future. (Moderate Risk)

4. Xenophobia, Nationalism, Corruption

India has seen a steep rise in xenophobic attacks post the 2014 elections. India has
witnessed several communal and caste-based riots over the last six years. Incidents of
riots and lynching have further increased the xenophobic undertone. People in power
have been culprits often, and their clan of vigilantes have set on a path of divine justice
taking the law into their own hands. Clashes with neighbours, mainly Pakistan and China,
have further increased the Nationalist rhetoric throughout the country.

The amendment to the Right to Information Act has made it toothless, which can further
result in widespread corruption. There have been corruption allegations made by the
opposition on several deals; however, no thorough investigation has taken place.

Risk Evaluation
All these metrics are red signals with respect to investment and should be carefully
monitored. Jingoism is on the rise in India due to right-wing politics and national media
houses brazenly promoting communal hatred. (High Risk)

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5. Social Conditions (Population Density and Wealth Distribution)
India is the second most populated country in the world after China. In 2016, India had a
population density of 386 people living per sq. km. The forecast for 2021 is 408, and for
2026 is 426 people per sq. km. The population of India is growing rapidly, and hence
labour force quantitatively should not be an issue. While the inequality around the world
has gone down, India has been following a reverse trend. The wealthiest 1% of the
population hold wealth more than the poorest 70% of the people. This showcases the
severity of wealth inequality in the country.

Risk Evaluation
The population growth guarantees labour force; however, the quality and skill of the
labour force remains an unanswered question. Also, if there is widespread
unemployment added to the severe wealth inequality, this might lead to unrest in the
country. (Moderate Risk)

6. Strength of the Radical Left

Left-wing extremism, also known as Naxalism is one of the most severe internal threats
facing India said the Home Ministry of India in 2018. Although in the past decade the
number of attacks and casualties has gone down there still were 833 attacks spread
across 60 districts in 2018 resulting into around 230 deaths. The activities of these radical
groups are confined to a region rightly termed as the 'Red Corridor' which includes
districts from the states of Maharashtra, Chhattisgarh, Andhra Pradesh, Telangana, Bihar,
Jharkhand, and West Bengal.

Risk Evaluation
Apart from the red corridor, Naxals pose almost zero threat in the rest of the country. So,
there is significantly less risk with respect to Naxalism outside the ‘Red Corridor’ (Low
Risk)

7. Dependence on and/or Importance to a Hostile Major Power

India has significant investments round the globe, including all G7 and G20 countries.
India has good trade relations with the United States of America, Russia, the United
Kingdom, France, Germany, Brazil, Japan etc. However, the tensions between India and
China have worsened in the past few months after brutal clashes erupted between the
two troops in the Galwan Valley. The major cause for this is the ill-defined 3.440 km
border that both India and China dispute.

Risk Evaluation
India does not have significant obligations towards any superpower and has remained
non-aligned since Independence. However, an escalation of the recent border clashes is
a cause of concern. (Moderate Risk)

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8. Negative Influences of Regional Political Forces
The Indian subcontinent is the least integrated region in the entire world. Since getting
independence from the British in 1947, India and Pakistan have fought three major wars
mainly for the territory of Kashmir. India and Pakistan are Nuclear powers, and there is
always tension. China has always sided with Pakistan by providing both military and
financial aid. China has been further making investments in neighbouring countries like
Nepal, Sri Lanka, Bhutan, Bangladesh which traditionally have been India allies. Hence
New Delhi has become more suspicious of Beijing’s intentions.

Adding to this, the recent border confrontation with China at Ladakh was the first one
since 1962. Things have escalated politically in India, leading to the banning of several
Chinese mobile apps. If the situation gets worse on the border, there could be more
regulations in the future. Post the Galwan strikes by China, Indian Navy has strategically
deployed its warships near the Malacca Straits which is a route taken by Chinese vessels
to enter the Indian Ocean. This has further escalated tensions with the Chinese warning
of serious repercussions.

Risk Evaluation
Political relations between India and China will play a key role in determining the nature
of the investment. If the border tensions and confrontation in the South China Sea
escalate into something more, Chinese investments in India could face huge backlash.
(High risk)

9. Societal Conflict (Demonstrations, Strikes or Street Violence)

At the beginning of 2020, 250 million workers went on a strike across the country to
protest the economic policies of the incumbent Govt related to selling off and
privatization of state-owned companies. These protests became violent in some parts of
the country resulting in arson and stone-pelting. There is a strong network of Trade
Unions throughout India who plan and organize these strikes.
Communal riots broke out in Delhi, leading to 53 deaths in late February 2020. These
were related to or in response to the nationwide protests against the controversial
Citizenship Amendment passed by the parliament in late 2019.

Risk Evaluation
Be a risk only if the conflicts are related to the automobile industry. The slowdown may
cause some troubles related to layoffs of labour, but to prevent that fresh investment
will always be welcome. (Low to Moderate Risk)

10. Instability (Unconstitutional Changes, Civil War, Assassinations)

The Citizenship (Amendment) Act, 2019 offers amnesty to religious minorities fleeing
from neighbouring countries of Bangladesh, Pakistan, and Afghanistan. The bill has
prompted massive protests throughout the country labelling the bill as unconstitutional.
Critics say it is exclusionary and violates the secular principles of the Constitution. "The
Constitution prohibits religious discrimination against its citizens and guarantees each

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 person equality before the law and equal protection of the law." There have been
massive rallies, mostly peaceful, in different parts of the country against this law. The
CAA is linked with the National Register of Citizens and could deem millions of Indian
Muslims as illegal citizens. Taken together, the NRC and CAB have the "potential of
transforming India into a majoritarian polity with gradations of citizenship rights," said
sociologist Niraja Gopal Jaya.

Risk Evaluation
The CAA protests have mostly died down due to the COVID pandemic, but it remains to
be seen if it will be continued once the situation reverts to normal. However, the protest
may not have much effect on investment. (Low Risk)

Sources:
• http://www.indiastat.com.iimcal.remotexs.in/
• http://www.indiastat.com.iimcal.remotexs.in/demographics-data/7/language/154/stats.aspx
• http://www.indiastat.com.iimcal.remotexs.in/table/demographics-
data/7/language/154/1139259/data.aspx
• http://www.indiastat.com.iimcal.remotexs.in/
• https://www.bbc.com/news/world-asia-india-50670393
• https://www.dailysabah.com/asia/2020/01/08/nearly-250-million-workers-strike-in-india-to-protest-
modis-economic-policies
• https://www.drishtiias.com/daily-updates/daily-news-analysis/left-wing-extremism-in-india
• https://economictimes.indiatimes.com/news/economy/indicators/wealth-of-indias-richest-1-more-
than-4-times-of-total-for-70-poorest-oxfam/articleshow/73416122.cms
• https://eurasiantimes.com/china-threatens-to-expel-indian-navy-warships-from-the-south-china-sea/
• https://www.bbc.com/news/world-asia-53062484

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II. Economic Risk Assessment – Based on ICRG Index Variables
By: - Pratik Gandhi (0046/56)
1. GDP per Head
Per capita GDP of India is compared to that of other similar countries in the region to
juxtapose their performance. For India, we consider below countries to be comparable
given the similar economic environment and investment flow attracted.
GDP per capita (2019)
Country % of Score
in current US$
average (out of 5)
Bangladesh 1,855 37.1% 1.5
India 2,104 42.0% 2
Indonesia 4,135 82.6% 3
Malaysia 11,414 228.0% 4.5
Thailand 7,808 156.0% 4
Vietnam 2,715 54.2% 2.5
Average 5,005 - -
Source: World Bank
India's GDP per capita is comparable to the countries in the region except for Malaysia
and Thailand. One factor affecting the GDP per capita is India's high population (at ~ 1.35
billion) which negatively skews the number.
Estimated GDP per capita (at current prices) (in US$)
Country 2019 2020 (E) 2021 (E) 2022 (E) 2023 (E) 2024 (E) 2025 (E)
India 2,104 1,880 2,030 2,200 2,370 2,540 2,730
Source: IMF
As per latest IMF data, India's GDP per capita is forecasted to reach US$ 2,730 in 2025.

Potential Risks
With rising living standards due to increasing GDP per capita, the number of cars per
capita owned in India is also likely to increase. However, if the Indian economy
experiences an extended slow-down post COVID-19, the automotive sector may witness
muted demand.

2. Real GDP Growth

India clocked a real GDP growth rate of 4.2% in 2019. This gives India a score of 9 out of
10 as per ICGR guidelines. India has consistently been among the fastest-growing major
economies in the world over the last two decades or so.
Real GDP growth
Country 2019 2020 (E) 2021 (E) 2022 (E) 2023 (E) 2024 (E) 2025 (E)
India 4.2% -10.3% 8.8% 8% 7.6% 7.4% 7.2%
Source: IMF
India has regularly clocked a real GDP growth rate of over 6%. However, India witnessed
an economic slowdown beginning 2017. New structural reforms like demonetisation (in
2016) and GST (in 2017) proved to be massive disruptions. Further, as per the latest IMF

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 report, the global real GDP is expected to fall by 4.4% in 2020 because of COVID-19. India's
real GDP will also contract by over 10%. This is predominantly due to the interruption of
economic activity because of the government-mandated lockdowns across the country.
However, despite the steep fall, IMF estimates that India will get back on the growth track
with a real GDP growth rate of 8.8% in 2021 and remain over 7% till 2025.

Potential Risks
If the India’s real GDP growth rate remains low, the sale of cars in India would be
negatively affected due to cyclicity of the automotive sector.

3. Annual Inflation Rate

As per the IMF, India witnessed an inflation rate of 4.8% in 2019. This gives India a score
of 8.5 out of 10 as per ICGR guidelines.
Annual Inflation
Country 2019 2020 (E) 2021 (E) 2022 (E) 2023 (E) 2024 (E) 2025 (E)
India 4.8% 4.9% 3.7% 3.8% 3.9% 3.9% 4%
Source: IMF
During 2010 to 2014, India witnessed annual inflation of over 10% due to crude oil prices
reaching US$ 150 per barrel. With the fall in crude oil prices, India's annual inflation has
remained below 5% since 2015. In the past couple of years, inflation has remained benign,
which has also allowed India's central bank to reduce interest rates and combat the
economic slowdown in the country.

Potential Risks
If India witnesses higher inflation as compared to other countries, it may negatively affect
the Indian rupee. Since the automotive industry imports majority of the components, a
weak rupee may result in higher input costs for the company.

4. Budget Balance as a Percentage of GDP

IMF calculates budget balance as the difference between revenues and total
expenditures, excluding net lending. As per IMF, India had a negative budget balance, i.e.
fiscal deficit of 8.2% in 2019. This gives India a score of 3.5 out of 10 as per ICGR
guidelines.
Fiscal Deficit as a percentage of GDP
Country 2019 2020 (E) 2021 (E) 2022 (E) 2023 (E) 2024 (E) 2025 (E)
India 8.2% 13.1% 10.9% 10% 9.6% 9.3% 9.1%
Source: IMF
India has generally operated on a deficit budget and financed the expenditures with
borrowings. India's fiscal deficit inched higher in 2019. This is due to lower direct and
indirect tax revenues. Also, plans to divest holdings in various PSUs have not fructified.
On the other hand, rising employee costs, including pensions to retired government
personnel, have left little fiscal room. IMF forecasts fiscal deficit to increase to 13% in
2020 and then gradually decrease up to 9% in 2025.

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 Potential Risks
If the fiscal situation worsens, the Indian government may resort to higher direct as well
as indirect taxes to increase the revenues. This may prove to be a drawdown on the
profitability of the company.

5. Current Account as a Percentage of GDP

As per the IMF, India's current account balance as a percentage of GDP was -0.9% in 2019.
This gives India a score of 11.5 out of 15 as per ICGR guidelines.
Current Account Balance as a % of GDP
Country 2019 2020 (E) 2021 (E) 2022 (E) 2023 (E) 2024 (E) 2025 (E)
India -0.9% 0.3% -0.9% -1.6% -2% -2.4% -2.5%
Source: IMF
India has been a net importer of goods. Crude oil forms a significant portion of India's
import bill, and lower crude oil imports in 2019 have resulted in a lower current account
deficit. Due to disruptions in the global supply chain and resultant lack of foreign trade
around the world, the current account surplus is expected to be at 0.3% in 2020. Also, to
promote self-sufficiency and boost the manufacturing output in the country, the Indian
government has decided to source goods from domestic producers for various projects
and increased tariffs on imports. This may also result in a lower current account deficit.

Potential Risks
In case the current account deficit of the country rises or India doubles-down on self-
sufficiency, Indian government may increase the tariffs to disincentivise imports which
may prove to be a risk to the investments because of reliance on raw material imports.
The Financial Risk Components
1. Foreign Debt as a Percentage of GDP
As per RBI, India's foreign/external debt as a percentage of GDP was 19.8% in 2019. This
gives India a score of 8.5 out of 10 as per ICGR guidelines.
Foreign Debt as a % of GDP
Country 2016 2017 2018 2019 2020 (E)
India 23.4% 19.8% 20.1% 19.8% 20.6%
Source: RBI
Indian Government has mostly preferred to raise debt from within the country. While
India's total debt has been close to 80% of GDP, the external debt has only been around
20% of GDP. Reliance on internal sources for financing is mainly due to depreciating
Indian currency and lower sovereign credit rating. However, raising debt from domestic
investors may result in 'crowding out' investments in the private sector.

Potential Risks
A higher foreign debt may result in weaking currency as well as creditworthiness of the
country. This may prove to be a huge risk to the investments made because of the reliance
on imports as well as create difficulty in raising capital.

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2. Foreign Debt Service as a Percentage of Exports of Goods and Services
As per the World Bank, India's foreign debt as a percentage of exports of goods and
services was 11.82% in 2018. This gives India a score of 9 out of 10 as per ICGR guidelines.
Foreign Debt as a % of Exports of Goods and Services
Country 2015 2016 2017 2018
India 11.92% 17.51% 10.28% 11.82%
Source: World Bank

India's foreign debt service as a percentage of exports of goods and services has remained
low due to India's low reliance on external debt. India's external debt as a percentage of
GDP at 20% is just a quarter of the overall debt as a percentage of GDP at 80%.

3. Current Account as a Percentage of Exports of Goods and Services

As per the World Bank, India's current account as a percentage of exports of goods and
services was -5.01% in 2019. This gives India a score of 11.5 out of 15 as per ICGR
guidelines.
Current Account as a % of Exports of Goods and Services
Country 2015 2016 2017 2018 2019
India -5.39% -2.76% -7.66% -12.18% -5.01%
Source: World Bank
India runs a marginal current account deficit when measured as a percentage of GDP.
With the central government's impetus to self-sufficiency by increasing exports and
limiting imports, India's current account as a fraction of exports of goods and services is
likely to improve in the future.

4. Net International Liquidity as Months of Import Cover

As per World Bank, India's net international liquidity measured as months of import cover
was eight months in 2019. This gives India a score of 3.5 out of 5 as per ICGR guidelines.
Net International Liquidity as Months of Import Cover (in months)
Country 2015 2016 2017 2018 2019
India 8 8 8 7 8
Source: World Bank
India has amassed vast foreign exchange reserves over the years, which provides them
ample liquidity to cover its import bill. Further, with highest ever foreign exchange
reserves at US$ 541.43 billion, India can easily fund its import requirements as well as
service its foreign debt.

Potential Risks
Dwindling forex reserves may lead to capital controls being laid down with restrictions on
imports as well as currency repatriation. This may prove to be a risk to the investment.

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5. Exchange Rate Stability
Indian rupee depreciated by 2.12% against the US dollar in the calendar year 2019. This
gives India a score of 10 out of 10 as per ICGR guidelines.
Annual Appreciation/Depreciation of Indian Rupee against the US dollar
Country 2015 2016 2017 2018 2019
India -4.53% -2.56% 5.97% -9.54% -2.12%
Source: XE.com
Indian rupee has mostly remained stable. The high volatility in 2017 and 2018 was due to
the US Federal Reserves' intention to unwind the Quantitative Easing and the resultant
foreign investment outflow from developing countries. With annual inflation differential
of 3% to 4% between India and the United States, the annual depreciation in Indian rupee
is quite natural. Also, the RBI tends to maintain a depreciated rupee to keep exports more
favourable.

Potential Risks
If the currency depreciation is higher than expected it may be detrimental to the
investments because of higher reliance on imports. Due to a weak Indian rupee, the input
costs may rise and hence the profits may worsen.

Conclusion
With a total score of 77.5 out of 100 as per the ICGR guidelines, India is quite a favourable
destination for foreign investments as far as economic risks are concerned. Indeed, there
are risks concerning India's fiscal position with the fiscal deficit expected to remain as high
as 7% over the coming years. However, if India can achieve real GDP growth of 6% to 8%
with investments in productive assets, the fiscal deficit can be managed.

Sources:
• https://data.worldbank.org/indicator/NY.GDP.PCAP.CD
• https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD
• https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/ADVEC/WEOWORLD
• https://www.imf.org/external/datamapper/GGXCNL_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC
• https://www.imf.org/external/datamapper/BCA_NGDPD@WEO/OEMDC/ADVEC/WEOWORLD
• https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50021#:~:text=At%20end%2DMa
rch%202020%2C%20India's,placed%20at%20US%24%2016.6%20billion.
• https://data.worldbank.org/indicator/DT.TDS.DECT.CD?locations=IN
• https://data.worldbank.org/indicator/NE.EXP.GNFS.CD?end=2019&locations=IN&start=1960
• https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?end=2015&locations=IN&start=1975
• https://data.worldbank.org/indicator/FI.RES.TOTL.MO?locations=IN
• https://www.xe.com/currencycharts/?from=USD&to=INR&view=5Y

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III. Legal and Regulatory Risks of Doing Business in India
By: - Shikhar Singhi (0062/56)

1. Primary Regulations:
The Motor Vehicles Act 1988 (MVA) read with the Central Motor Vehicles Rules 1989
(the CMV Rules) issued by the central government, constitutes the principal regulatory
framework for the manufacture, registration, and insurance of automobiles.

The act provides authority to the central and state governments to make and implement
rules regulating the construction, equipment, and maintenance of automobiles for
multiple aspects, including dimensions, emission norms, braking systems, steering
gears, safety devices, and warranty after-sales. The central government administers and
regulates the industry through the Ministry of Road Transport and Highways (MoRTH).

The manufacturing and maintenance of an automobile should be in line with the

parameters and standards as prescribed under the CMV Rules. The checks and controls
are applicable at the stages of:
i) plan to manufacture or import a new automobile
ii) during the manufacturing process
iii) sale and use of an automobile

2. FDI and JVs:

The GoI encourages foreign investment in the automobile sector and allows 100 per cent
foreign direct investment (FDI) via the automatic route and no licensing requirements,
making it easy for foreign players to establish their manufacturing facilities in India. Still,
we see that most of the foreign automotive companies do manufacturing and
distribution business in India by establishing joint ventures with Indian counterparts.
Even the automotive parts manufacturers have followed this type of commercial setup.

Generally, in a joint venture arrangement in the automotive sector, the Indian venture
partner obtains all local licenses and approvals required for manufacturing operations.
On the other hand, the foreign partner, besides bringing in capital contribution, is
primarily the source of technology, technical assistance, and R&D. They often negotiate
a royalty (usually based on the total sales made by the joint venture company) as
consideration for licensing the technology to the joint venture.

Major risks?
• The rising tensions with China and the consequential amendment in the form of
additional scrutiny by the Ministry of Home Affairs to approve FDI proposals from nations
with which India shares a land border (essentially targeted towards China) can be a
considerable risk factor here.
• Competition Commission of India (CCI), India's anti-trust watchdog, actively investigates
allegations of anti-competitive behaviour in the automotive sector. All partnerships or
mergers and acquisitions, beyond a particular size, need to be approved by them.

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• Indian automobile manufacturers, with vocal support from the GoI, have lately been
demanding a reduction in royalty rates charged by international partners.

3. Product-related Regulations:
A manufacturer or importer that intends to manufacture or import a new automobile
needs to obtain prior approval of the prototype of such an automobile from the
designated testing agencies. The procedure for approval and certification of automobiles
for compliance with the MVA and CMV Rules should be in accordance with the
Automobile Industry Standards, as prescribed by the central government. For
automobiles in production, the CMV Rules require the manufacturer to conduct
production tests periodically on automobiles drawn from the production line to prove
that they conform to the approval certification.

a. Technical Standards:
• Transport Engineering Division Council (TEDC) of Bureau of Indian Standards (BIS) is
the main body in the Indian automotive sector to engage in the formulation of
standards in the field of transport engineering including air, water, road, and rail
transport; diesel engines for stationary application and ISO freight containers,
transport packaging, etc.
• Electro-Technical Division Council (ETD) of BIS is responsible for to prescribe
standards in the field of electrical batteries. Hence, they become essential in the case
of electric vehicles.

Since 2006, India is a signatory to the UN WP 29 1998 Agreement. We see active

participation from India in the formulation of the Global Technical Regulation (GTR) by
contributing data and subject matter expertise. This has helped in the development of
GTRs taking into consideration the traffic and driving conditions in the developing
countries. More than 70% of safety regulations in India are either partially or fully
technically aligned with GTRs and UN Regulations.

b. Emission Norms:
The Ministry of Environment and Forests has laid down rules to ensure that standards
for emission of air pollutants from automobiles are kept in line with the international
standards. Schedule IV of the Environment (Protection) Rules 1986 lists down standards
for emissions of smoke, vapor, etc., from automobiles. Based on European regulations,
the Bharat Stage Emission Standards are emission standards that have been set up by
the central government to regulate air pollutants from internal combustion engine
equipment, including motor vehicles. Currently, the vehicle emissions standards
adopted throughout the country are the Bharat Stage VI or BS-VI.

Major risks?
• Though India follows the path to converge with international standards and it has not
had the history of introducing sweeping regulatory changes, a future change in product
or technical regulations may hurt the potential margins, selling price as well as the
ability to capture the market.

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 • The push for cleaner fuel and stringent emission norms is likely to drive up the cost of
manufacturing as well as running automobiles. Such moves are likely to suppress the
propensity of consumers to purchase automobiles.

4. Taxes and Duties:

Nature of tax Vehicle Category Rate
Passenger / Commercial Vehicles 28%
GST
Electric Vehicles 5%
Passenger vehicles (petrol, CNG, LPG) 1%
Passenger vehicles (diesel) 3%
Mid-size PVs 17%
Compensation Large PVs 20%
cess SUVs 22%
Hybrid vehicles (except small) 15%
>350cc two-wheelers 3%
10 – 13 seater public transport vehicles 15%

Major risks?
• GST laws are still developing, and frequent changes in tax rates will make sales and
revenue forecasting a challenging task.
• A worsening fiscal deficit may lead the GST Council to raise 'Compensation Cess', which
in some cases accounts for ~40% of the GST component. Since it is passed on to the final
customer, demand may vary based on what rates are levied, especially in the case of
larger vehicles.

5. Intellectual Property Rights:

The automobile industry is one of the most innovative sectors, and thus, intellectual
property (IP) becomes a vital asset for automotive companies.

The Trade Marks Act 1999 provides, among other things, for registration of a trademark,
filing of multiclass applications, increasing the tenure of registration of a trademark by
ten years, as well as recognition of the concept of trademarks and brands.

The Patent Act of 1970 also plays a vital role in the automobile industry. A new invention
in the form of technology and technique can be granted protection when registered with
the concerned authority.

Major risks?
• General regard for IP rights and the degree of IP law enforcement.
• The advent of electric vehicles, which are mainly software-driven, has made copyright
protection of such software all the more important.
• The protection of trademarks in the automotive industry, where an automobile is known
by its marks and symbols, is crucial.

14
6. Labour Laws:
There are more than 200 labour laws active in India, with almost 1/4 th of them being
central laws. Navigating through a plethora of laws can be a challenging task for a
manufacturing entity in India.

Major Risks?
• The Industrial Disputes Act (IDA), 1947 stipulates that firms with 100 or more workers
shall seek approval from the government to retrench or lay off any worker. However, this
permission is rarely granted.
• The Industrial Employment (Standing Orders) Act, 1946, requires employers with 100 or
more workers (50 or more in some states) to seek permission even for reassigning tasks
among workers.
• The Trade Unions Act allows any seven employees to form a union, thereby tying up a
large proportion of the firm's managerial bandwidth in dealing with several unions. It
empowers unions with the right to strike and represent workers in legal disputes with
employers.
• The Contract Labour (Regulation and Abolition) Act, 1970, restricts and even prohibits
the use of contract workers for certain jobs.
• Amendments in the Minimum Wages Act, 1948, or the recently enacted Code on Wages
Act make it mandatory for entities to comply with certain wage rates – which will have a
direct impact on the cost structure of such entities.

7. Consumer Protection Laws:

At present, no legislation deals with product liability, specifically in the case of
automobiles. In the event a customer suffers losses due to a defect in an automobile,
such a consumer has a remedy against the manufacturer or supplier of the automobile
under the Consumer Protection Act 1986 (the CP Act). Claims under the CP Act can be
made before consumer forums at the district, state, and national levels. The term 'defect'
has a very wide definition in the CP Act to include any fault, imperfection, or shortcoming
in the quality, quantity, potency, purity, or standard which is required to be maintained
under any law or under any contract, express or implied or as is claimed by the trader in
any manner whatsoever concerning any goods.

Major Risks?
• The usual remedy granted by the consumer forums is a refund of the purchase price of
the automobile along with interest and in some cases replacement of the automobile.
Further, the consumer forums may award damages for harassment and mental trauma
caused to the consumer if the consumer proves that the accident and the consequent
injury/harm/loss were as a result of the manufacturing defect.
• There is no stipulated cap on the damages that can be granted, and the consumer forums
take into consideration factors such as loss of income, the number of dependants on the
injured or the deceased person, mental pain and injury suffered, etc.

8. Potential Regulations:
The GoI has attempted to introduce legislation to regulate advancements in automotive
and mobility technology. However, most have not yet become law and is still in the
nascent stages of development.

15
 The Automotive Mission Plan 2016-26 (AMP 2026) intends to chart a blueprint for the
evolution of the automotive ecosystem in India, including the path for specific regulations
and policies that govern research, design, technology, testing, manufacturing,
import/export, sale, use, repair, and recycling of automotive vehicles, components, and
services, over the next few years.

Major Risks?
• AMP 2026 seeks to implement a coherent inspection & certification regime wherein all
vehicles would be subject to a test of roadworthiness periodically. Such measures will
increase the cost of owning a vehicle.

Major legal and regulatory reasons why some foreign automakers have not been
successful in Indian market in the past?
• Ad-hoc legal orders such as diesel ban in New Delhi by the Supreme Court in 2015 affects
demand momentum
• Inconsistent policy on excise duty (now GST) benefits to auto manufacturers, as well as
lack of clear definition of different categories of automobiles which attract varying rates
under GST
• Lack of clarity on which category of BS-VI needs to be implemented
• Changes in norms pertaining to degree of component supply localization makes it
unviable for some of them to incorporate the amended regulations, owing to nature and
features of product

Sources:
• https://www.lexology.com/library/detail.aspx?g=96fe928c-a7ac-4ddc-828f-a04c09d80ca9
• http://www.sesei.eu/wp-content/uploads/2018/12/Automotive-Sector-Report_-Final.pdf
• http://www.siam.in/uploads/filemanager/47AUTOMOTIVEMISSIONPLAN.pdf
• https://www.business-standard.com/article/economy-policy/law-on-assured-minimum-wage-for-
workers-faces-delay-as-govt-re-issues-draft-120070900829_1.html

16
IV. Modes of Investment – Based on Identified Risks
By: - Shourya Umang (0065/56)

Modes of Investments: Government of India allows up to 100% Foreign direct Investments

into Automobile manufacturing. Presented here are the various alternatives and the risks
involved with each of these.
1) 100% Owned subsidiary: Establishing a 100% owned unit in the automobile sector is
promoted by the Indian government via the automatic FDI channel approval but most
existing foreign investments do not follow this option due to various risks.

Pros: The benefits of such an expansion is the complete control over all operational &
sales decisions which becomes important if a foreign player wants to establish its brand
in a different country. It also insulates the investor from IP thefts and profit sharing
negotiations.

Risk Level – Medium to High:

Xenophobia & Nationalism – Nationalism was on the rise for a long time but due to the
ongoing border clashes between China and India, the rhetoric has achieved a new high
lately. Following the scuffle at the high-altitude remote border between the 2 countries,
the Indian government changed the FDI laws & instituted a high-level panel to screen all
investments being made into India from its bordering countries including China. Number
of Chinese origin mobile apps have been banned and tender projects bagged by Chinese
construction firms have been cancelled under various pretexts.
Local Regulations – India has a plethora of local laws ranging from technical regulations
to labour laws, which are enforced by various divisions of the government belonging to
centre and state. It is considerably risky for a foreign firm to be able to manoeuvre through
the bureaucracy and get all the necessary approvals in a timely fashion without local
expertise.
Expropriation Risk – Huge expropriation risks exists for foreign firms due to the
considerable fiscal deficit that the Government maintains. Expropriation can also be in
terms of added taxes and cess for foreign firms operating in India.
Exchange Rate - The Indian rupee depreciated about 2% in 2019 but the depreciation rate
remains volatile, appreciating by 6% in 2017 and depreciating by 9.6% in 2018. A
depreciating currency will have an adverse impact on the imports made by the company
which will become costlier as time progresses, while the overall Chinese Yuan profits
decline over time.

2) Majority Owned JV with Private partner: There are ample examples of Asian automobile
majors operating in this mode in India successfully for the past 2-3 decades.

17
 Pros: Local partner can be beneficial when getting regulatory approvals as well as work
with the Indian bureaucracy. Local partner also provides expertise about local markets,
which can help in increasing the reach and penetrate the market deeper.

Risk Level – Medium to Low:

Intellectual Property – There is a high likelihood of Intellectual property theft by an
aggressive local partner or another competitor. This can lead to the firm’s technical
advantage withering away over time. Although India has well evolved IP protection law
for patents & trademarks, Indian judicial system in general is over-burdened.
Royalty payments – Royalty payment by the JV to the parent company as a conflict may
develop between the 2 parties of the JV. Recently, various Indian partners of Global Auto
giants have voiced concerns in this regard and the Government has supported these
concerns. However this can be mitigated by way of agreeing on limits to renegotiation
terms on lapse of current agreement.
Licencing issues – This is closely related to IP protection risks, but the local partner may
attempt to supply similar products under its brand name in markets and geographies not
falling under the JV agreement.

3) Majority Owned JV with Govt/PSU Partner: Maruti Suzuki was India’s first JV established
between the Government of India & Suzuki motors and is a successful example of an
automobile JV.
Pros: Proximity to the Government through the JV gives the company an opportunity to
influence policy making and technical regulations development in India for the upcoming
Electric Vehicle Industry. It will also help promote Chinese EV & charging standards in India
which can be of long term benefit to the company.
Risk level - High:
Government Bureaucracy - The speed of decision making in such a JV will become very
slow and the company may find it hard to respond to competitors and shocks due to the
slow speed of Government body’s decision making process. The bureaucracy can also
present fractured leadership leading to paralysis in decisions.
Fiscal Deficit - Indian government has continued to be in a state of high Fiscal deficit. If
the government is not able to ramp up its disinvestment effort in selling Public Sector
undertakings, they may find it difficult to finance the Fiscal deficit while keeping inflation
under control. Government may find it sensible to finance its fiscal deficit from the profits
earned by the JV rather than reinvesting the profits to expand presence and scale of
operations.
Current Account Deficit - India is highly dependent on China for its electronics imports and
the Middle East for its crude oil imports. India’s trade deficit with China has been growing
consistently over the years, with net electronics import bill of $56.5 Billion in FY19. The
government has shown tendencies to put trade barriers to control Current account
deficits and protect domestic firms. Given the reliance of India on Chinese electronics

18
 imports, the government might frame policy to dissuade imports or raise cost of imports
from China.
Royalty to parent company - The fraction of royalty payment can become an issue with
various governments. Since the central leadership can potentially change every 5 years, a
nationalistic government may force the JV to reduce its royalty payments to China.
Potential Centre-State conflict - At times different governments at the Central level and
the State level have conflicts which can spill over and effect the JV unnecessarily.
4) Minority Owned JV with Private/Government/PSU Partner:

Pros: A local partner with majority share can have positive impact on the brand of the JV.
Since nationalism has been on the rise for the past few years in India, a local player as the
face of the JV will help promote the sale of the product with Indian consumers.

Risk Level – Very High:

Control & Governance risk - Owning a minority stake can lead to issues as the parent
company may not be able to control the decisions made by the board and higher
management. It is certain that the company will lose out its technical and managerial
advantage to the local partners who may benefit privately form the knowledge.

Choice of Products:
Conventional Vehicles: India is a hub for Conventional vehicles & auto parts manufacturing
with most major manufacturers having a presence in India. Overall, the annual domestic sales
clocked 2.1 Million units sold in 2019-20, with 2 wheelers taking the lions share at 1.75 million
units. India’s conventional automobile sector is very competitive with a presence of multiple
brands having mature production and service chains. Entering this segment will be a high risk
move due to the existing structure of the industry. This segment presents a high-medium
risk outlook.
Electric Vehicles: Indian government is incentivising the usage of electric vehicles in India, by
providing tax breaks and price subsidies via its FAME scheme for EV purchases. EVs also fall
in the 5% GST tax slab compared to 18% tax slab for ICE vehicles. The reason for the subsidies
is the large Current account deficit India faces due to the oil import. Government of India
wants to shift away from oil to reduce its Current account deficit & hence the subsidies for
EVs will continue in the medium to long term. The EV industry in India is in its nascent stages
due to its lack of charging infrastructure and a lack of EV availability. Although India has a
large base of low end, electric tricycles for last mile connectivity, known as E-Rickshaws and
the customer have shown an interest in the product. Entering EV segment can be a lucrative
opportunity due to the first movers advantage & favourable government policies. This
segment presents a medium risk outlook.

19
Scale of Operations:
1) Import – Resell Model: This mode of operation will require investment into Warehouses
& agreements with Customer facing showrooms & maintenance workshops to run. It
poses minimal investment risk but the company might face Government scrutiny as it will
increase India’s CAD & will not lead to large scale local employment generation. The
government will also favour firms that provide a certain degree of technology transfer,
that will not happen in this model of operation. Implementation can be purely through
Brownfield Investments, by purchasing existing facilities, expanding & retrofitting it
according to the requirements. (Risk level: Medium-High)

2) Import SKD/CKD – Assemble – Sell Model: In this mode, the company will import Semi-
knocked down components from its manufacturing units in China, assemble these into
the final product in India and then sell it to customers. This mode of investment will
require investments into assembly facility over and above the previous model and will
require hiring of a considerable semi-skilled labour force, who will have to be further
trained according to the needs, this can be a substantial cost for the firm. The costs in this
mode may go up due to local inefficiencies in regulations compared to China based
manufacturing, but will lead to substantial risk mitigation in terms of lowering of
Government scrutiny and approval difficulty. It can be done through Greenfield
investment or Brownfield investment. (Risk Level: Medium)

3) Manufacture – Assemble – Sell Model: This mode of operation will require large scale
investment into setting up end to end manufacturing facilities, maintenance workshops
& showroom agreements (franchise model). The company will be exposed to substantial
Operational Risk along with Regulatory Risks, although various state governments
promote such investments and help companies to set up facilities by providing single
window for approvals to cut red tape, but under the desk corruption is prevalent in India
and the cost for regulatory approvals go up with the scale of investments made. This mode
will most likely require Greenfield Investments. (Risk Level: High)

Conclusion:
Among the various alternatives presented for modes of investment, the firm should enter
India by entering into a Joint Venture with a minority share owning local partner with a track
record of successful operations in a related field, as this presents the most favourable risk
outlook of Medium-low. In terms of the choice of products, Electric Vehicles present a better
opportunity compared to Internal Combustion vehicles and the JV should be set up to solely
focus on EV market in India.
The scale of operations in the short to medium term, should be the “Import SKD/CKD –
Assemble – Sell” model as it is the least risky. In the long term, if the India investment yields
ample returns, the company can look into the possibility of building local manufacturing
facility and shift to a “Manufacture-Assemble-Sell” model, after gaining local experience and
if the prior investments are profitable.

20
Sources:

• https://in.reuters.com/article/us-health-coronavirus-india-investments/india-toughens-rules-on-
investments-from-neighbours-seen-aimed-at-china-idUSKBN2200LQ
• https://powermin.nic.in/sites/default/files/webform/notices/Charging_Infrastructure_for_Electric_Ve
hicles%20_Revised_Guidelines_Standards.pdf
• http://www.siam.in/statistics.aspx?mpgid=8&pgidtrail=14
• https://auto.economictimes.indiatimes.com/news/industry/india-has-more-e-rickshaws-than-chinas-
e-vehicles-fleet/66373571
• https://www.indiatoday.in/magazine/cover-story/story/20160509-judicial-system-judiciary-cji-law-
cases-the-long-expensive-road-to-justice-828810-2016-04-27

21
 V. Scenario Analysis
By: - Shreyansh Sharma (0225/56)

Scenario Drivers
We have identified five drivers which we think will have the highest impact on key sectors in
India in the future:

• Demographics and Politics: Key demographic factors like growing middle class and
available labour force and the political environment regarding self-sufficiency drives,
xenophobia, nationalism, etc. will play important roles in Industrial Development
• Economy: Factors like GDP growth rate, unemployment rate, Rupee exchange rate
and import tariffs are considered
• Regulation and Taxes: FDI regulations, tax regime, labour laws and IP protection
laws are considered factors
• Technological Changes and Infrastructure: Infrastructural conditions and
Technological changes in Industries like Automation are considered
• Geopolitical Factors: The current geopolitical tensions and overall regional stability
are considered factors

Scenario Overview
• Optimistic: Markers act in our favour
• Neutral: Markers remain neutral
• Pessimistic: Markers act negatively

Scenario Analysis

Scenario Optimistic Neutral Pessimistic

Drivers
Demographics The middle-class segment
grows at a higher rate than
and Politics the population and labour
force growth rate
Demographic Dividend
provides ample Labour Force,
The Labour Force
Participation Rate reverses its
decreasing trend and rises to
about 60% by about 2035,
backed by increasing female
participation in the labour
force and improved, with
The middle-class segment
grows at the current rate
along with the population
growth rate
India’s Demographic Dividend
provides a large labour force,
The Labour Force
Participation Rate settles at
the present value of about
49%, investment in human
capital remains fixed, labour
force grows but lack of skilled
workers
The middle-class segment
sees negative growth with
growing population, thus
signalling increasing poverty
and less buying power among
the population
The Labour Force
Participation Rate further
declines from its present rate
to around 40% by 2035, thus
signalling a large percentage
of working age population
out of the labour force,
human capital investment
remains ignored, making the

22
 Increased investment in
human capital ensuring a
large skilled workforce
The government at the
Centre facilitates the
necessary environment for
investment in the country
and does not indulge in
protectionist measures by
introducing reforms focussing
on job creation, bringing in
new technology through FDI.
India’s rank further improves
in the Ease of Doing Business
Index.
The Xenophobia prevalent in
Indian society diminishes,
backed by good relations with
its neighbours in the future
Economy India shows a recovery in GDP
growth rate starting from
2021 backed by economic
reforms and reinvigorated
demand, and sees its GDP
growth rate settling at around
average 7% Y-o-Y for the
subsequent years
GDP per capita continues
growing at a rate of around 7-
8%, thus giving people more
buying power to purchase
automobiles
Rising GDP and conducive
investment environment
leads to job creation, leading
to lower unemployment rate
The Indian Rupee strengthens
against the US Dollar to
around 60-65Rs/$ owing to
stable inflation rate, an
increase in Forex Reserves
and lower Foreign Debt, thus
facilitating imports
India witnesses a Current
Account Deficit of around 0-
0.5% based on low oil prices
available labour force
unemployable
The government at the The government tries to bring
Centre continues to be pro- in economic nationalism by
business and tries to attract placing curbs on Foreign
Foreign Investment, while Investment and solely
trying to push for self- favouring local or
sufficiency on the sides by government businesses as a
incentivising local businesses. political tool to remain in
power.
The Xenophobic and A significant rise in
Nationalist tendencies of the Xenophobia and Nationalism,
people remain as they are, due to various geopolitical
with a general mistrust of measures, making it
neighbouring nations like impossible for Chinese or
Pakistan and China Pakistani firms to conduct
business in India owing to
government bans, people’s
boycott, etc.
India’s GDP growth rate The economy of India never
recovers in around 2022 recovers and GDP continues
according to IMF’s prediction. contracting for the coming
India maintains an average 4- years. Recovery happens too
5% Y-o-Y GDP growth rate for late and India maintains an
the coming years average 1-2% Y-o-Y GDP
growth rate for the coming
years
GDP per capita grows at the GDP per capita stops growing
current growth rate of around and starts decreasing at
4%, thus increasing consumer around 1-2% Y-o-Y owing to
buying power but not at a slowed economic growth and
rapid rate rise in population growth rate
Job creation happens at the Unemployment rate rises
current rate, unemployment because of slowdown
rate averages around 7%
The Indian Rupee stays at The Rupee crashes and
around 72Rs/$ and does not reaches around 100Rs/$
decline further owing to rising foreign debt
and dwindling forex reserves
The CAD remains at around The CAD dwindles to about 5-
1.5-2%, the government 7% or the regime pushes self-
sufficiency, forcing the
23
 and increased exports, and decides to keep the import government to raise tariffs to
the government does not tariffs constant desist imports
promote self-sufficiency drive
leading to easing of import
tariffs
Regulations The government removes its The government maintains its The government outright
condition for firms from condition for firms from bans firms from neighbouring
and Taxes neighbouring countries to neighbouring countries countries to invest in India, or
seek approval before looking to invest to seek reduces the allowed FDI
investing in India, FDI laws are approval, maintains current percentage for these firms
eased with 100% automatic FDI regulations, with select forcing them to sell part or all
routes being the norm sectors having 100% FDI of their stake
through automatic routes
Taxes and cess are lowered, The government keeps the The government introduces a
owing to easing Fiscal Deficit GST tax rate and cess higher tax slab of around 35%
constant at present levels, or increases cess because of
because of Fiscal Deficit being growing Fiscal Deficit
constant at around 7%
Labour Laws are eased in Labour Laws and IP Labour Laws are
favour of industries, IP Protection laws remain the strengthened, IP Protection
Protection laws are same laws are diluted
strengthened and given
separate fast track courts
Technological Rapid Infrastructure Infrastructure development Infrastructure deterioration
development, with improved continues at present pace, due to dwindling power
Changes and land availability, connectivity, industrial development supply, degrading
Infrastructure power supply, facilitating happens but at a slow pace connectivity and stringent
industrial development land acquisition laws,
signalling declining industrial
sector growth
Quicker adoption of Automation grows at a steady Automation growth reverses
automation in factories, pace due to lack of infrastructure
which facilitates lower costs support, forcing costs to go
of production up
Geopolitical Countries in the region Diplomatic dialogues not Territorial and border
engaging in diplomatic being as effective, territorial disputes intensify, increase in
Factors cooperation to put an end to and border disputes continue geopolitical instability, and
border and territorial to exist, geopolitical threat of war in the region
disputes, and achieve instability from regional
geopolitical stability rivalries like now
Increased influence of SAARC, Organizations like SAARC not SAARC getting disbanded
or possible formation of a having much influence because of deteriorating
new organisation with the because of present rivalry relations between member
SAARC countries, China and and distrust among members countries, absence of any
other regional countries as like India and Pakistan central unifying regional
members, aimed at agency
improving cooperation and
trade relations between the
members
High economic growth of the Current level of economic The region witnesses
region and better trade growth, lack of or mediocre negative growth because of

24
 relations between all the cooperation between increased instability, owing to
regional countries through EU regional countries frequent conflicts among
like trade policies and free neighbouring countries
trade agreements

Industry Specific Markers

Scenario Optimistic Neutral Pessimistic

Drivers
Automobile The Automotive sector posts The Automotive sector The Automotive sector
an impressive recovery post- recovers some of the market slowdown gets further
Industry COVID backed by economic share post-COVID, but the aggravated post-COVID due
growth, with rising consumer demand is still not as good as to dismal economic growth
spending and demand pre-2018, with the industry and not enough disposable
witnessing slowing growth income
The government maintains The government stays The government introduces
technological standards, consistent with its regulations stringent regulatory changes
emission norms according to and emission norms aimed at cleaner fuel and
International Standards, this stricter emission norms,
does not drive costs higher which drives costs higher
The taxes on automobiles are Taxes on automobiles remain Taxes on Petrol/Diesel run
lowered, because of lower constant vehicles are increased to
Fiscal Deficit promote EVs
The government adopts a The government takes an The government pushes
collaborative approach with environment friendly stance environment friendly options
auto manufacturers to by pushing EVs like it is doing aggressively through
transition into right now, with lower taxes increased taxes and cess on
environmentally friendly and subsidies polluting vehicles
modes of transport like EVs,
providing them proper
environment to bring about
the transition
Electric Vehicles become the EV adoption becomes EVs do not become popular,
norm by 2025 with rapid R&D popular with government they stay expensive because
and Infrastructure providing support, but the of reduced government
developments led by firms, development is not as rapid support and lack of
while government provides and takes about 15-20 years infrastructure, with Internal
support through lower taxes from now to be the norm Combustion Engines still
and subsidies being the norm in the future
Other new technologies like Other new technologies Other new technologies find
Self Driving Cars, and develop at their own pace, it difficult to thrive in India
Connected Vehicles will see and adoption is not rapid because of lack of resources
early adoption in India with and government support
the government facilitating
innovation in the industry

25
Impacts
• In the Optimistic scenario, the Automobile Sector demand recovers post COVID,
based on strong GDP growth rate and increase in demand, while in Neutral scenario,
the sector recovers slowly to pre-2018 demand and then grows, while in Pessimistic
scenario, slowdown of the Indian Economy spells ruin for the sector, as demand
crashes
• In the Optimistic scenario, taxes on automobiles and import duties are reduced
based on easing Fiscal Deficit, strengthening currency and lower Current Account
Deficit, while in Neutral scenario they remain the same, but in Pessimistic scenario
taxes and import duties are increased to counter growing Fiscal and Current Account
Deficit
• India will see rapid widespread adoption of EVs in the Optimistic scenario based on
collaboration between automobile firms which will provide R&D support and
government which will provide lower taxes, subsidies, infrastructure development
support, etc. In the Neutral scenario the adoption happens but not at a rapid pace,
with the Pessimistic scenario seeing low adoption of EVs because of high prices due
to lack of research, infrastructure or government support

Sources:
• https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=IN
• https://data.worldbank.org/indicator/SP.POP.DPND?locations=IN
• https://data.worldbank.org/indicator/SL.TLF.CACT.ZS?locations=IN
• https://www.independent.co.uk/news/world/asia/india-china-population-2050-un-report-
a8970531.html
• https://censusindia.gov.in/vital_statistics/SRS_Report/9Chap%202%20-%202011.pdf
• https://economictimes.indiatimes.com/news/economy/indicators/gdp-growth-at-23-9-in-q1-worst-
economic-contraction-on-record/articleshow/77851891.cms
• https://auto.hindustantimes.com/auto/news/india-s-auto-sector-face-extended-slowdown-sales-may-
take-4-years-to-see-growth-41588838582178.html
• https://www.timesnownews.com/auto/features/article/indian-auto-industrys-recovery-better-than-
expected-fada/650668

26
VI. Risk Mitigation Strategies
Based on the various political, economic, fiscal and legal risks identified, various modes of
investments discussed, necessary risk mitigation strategy for each of the three scenarios
(optimistic, neutral and pessimistic) have been proposed as follows:
Optimistic Scenario: Risk Mitigation
Scenario Scenario Details & Risks
Drivers Involved
Demographics ▪ Demographic Dividend is in favour of
industrial growth & provides ample
and Politics
Labour Force. Increased investment in
human capital paid off with a very
large skilled workforce easing out
wealth inequality and thereby reduced
labour outrages and unrests in the
country.
▪ The Xenophobia & nationalistic
rhetoric prevalent in Indian society
diminishes, backed by good relations
with its neighbours in the future,
posing minimal risks of internal
tensions
▪ The government at the Centre
facilitates the necessary environment
for investment in the country and does
not indulge in protectionist measures
by introducing reforms focussing on
job creation, bringing in new
technology through FDI. India’s rank
further improves in the Ease of Doing
Business Index.
Economy ▪ India shows a recovery in GDP growth
rate starting from 2021 backed by
economic reforms, with auto industry
recovering quick. GDP per capita
continues growing at a rate of around
7-8%, thus giving people more buying
power to purchase automobiles
▪ Rising GDP and increasing buying
power of people allows government to
invest on eco-friendly technologies like
EV in accordance with its sustainable
development goals.
▪ The Indian Rupee strengthens against
the US Dollar to around 60-65Rs/$
27
By: - Mohammed Raashid (0444/56)
Risk Mitigation Strategy
▪ Political Risk Insurance: Since political risk
insurances usually have hefty premiums,
keeping in mind the favourable political
scenes, it is better to cut out that cost by
taking a political risk insurance of very
minimal down payment and premium, so
that it becomes more of a hygiene measure
rather than true risks mitigation measure.
▪ Developmental Assistance: Since
government’s favourable stance gives us
good prospect for long term vision
investment, especially in this developing
country setting, it is imperative to invest in
the nation building process to remain in the
good books of government as well as in the
eyes of public.
▪ Internal political risk mitigation: Very little
tensions against foreign investments and
absence of protectionist measures allows the
firm to even build future businesses with
minimal local ownership, but it must be
complemented with local employment
generation in order to stay local friendly
▪ Build invaluable status: When the economic
climate is positive and on a rising trend, firm
should make itself invaluable to the
government through 2 measures. Firstly, it
should enter the market for conventional
auto products to take advantage of its high
growth due to its cyclic nature with the broad
economy. Secondly, it should invest heavily
in charging infrastructure for EV which could
make government highly dependent on the
firm for its international success through
accomplishment of SDG.
▪ Currency risk sharing: When the government
is stable and in promotion of facilitating
 owing to stable inflation rate, an
increase in Forex Reserves and lower
Foreign Debt, thus facilitating imports
▪ India witnesses a Current Account
Deficit of around 0-0.5% based on low ▪
oil prices and increased exports, and
the government does not promote
self-sufficiency drive leading to easing
of import tariffs
Legal ▪ FDI laws are eased with 100% ▪
automatic routes being the norm as
(Regulations & the government removes its condition
Taxes) for firms from neighbouring countries
to seek approval before investing in
India
▪ Electric Vehicles become the norm by
2025 with rapid R&D and
Infrastructure developments led by ▪
firms, while government provides
support through lower taxes and
subsidies
▪ The government maintains
technological standards, emission
norms according to International ▪
Standards, this does not drive costs
higher
▪ Labour Laws are eased in favour of
industries, IP Protection laws are
strengthened and given separate fast
track courts
Neutral Scenario: Risk Mitigation
Scenario Scenario Details & Risks
Drivers Involved
Demographics ▪ India’s Demographic Dividend ▪
provides a large labour force, The
and Politics Labour Force Participation Rate settles
at the present value of about 49%,
investment in human capital remains
fixed, labour force grows but lack of
skilled workers. The middle-class
segment grows at the current rate
along with the population growth rate ▪
▪ The government at the Centre
continues to be pro-business and tries
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imports, it gives the firm much more
bargaining power in terms of setting the base
rates in these currency risk sharing
agreements (futures, swaps etc)
Contractual agreements: To put a restraint
on government from depreciating its
currency to support exports, agreements to
link import tariffs and fees to exchange rates
can save the firm as these are revenue
sources for the government, especially when
the economy is doing well.
Tax risk mitigation: Though change of tax
rates is less probable when the government
is pro-business, it is better to have done the
necessary regulatory due diligence, including
stringent arbitration clauses. This is to
protect against government’s chances of
raising the GST for EVs when it moves from
nascent stage into booming growth stage
Import duty risk mitigation: When the govt
is doing well, it could shift its policy to
promote export and thus linking its revenue
source (import duty) to exchange rate might
pull the government from doing so by
depreciating its currency
Labour law risk mitigation: Even though govt
allows for eased labour laws, not doing due
diligence during selection of contractors and
lack of necessary contracts & arbitration
measures could work against the interest of
a foreign firm. This is also necessary with
regards to protection of IP especially when it
comes to novel ideals EV charging
infrastructure
Risk Mitigation Strategy
Shared Political Risk Insurance: When
political risks are low but still there are
chances of nationalistic measures, it is
necessary to invest in a standard political risk
insurance. But in order to reduce costs, it can
try for a shared insurance scheme though
with lesser but effective protection at an
affordable cost
Selective Developmental Projects: In
developing countries with very high
populations bringing tangible results through
 to attract Foreign Investment, while
trying to push for self-sufficiency on
the sides by incentivising local
businesses.
▪ The Xenophobic and Nationalist
tendencies of the people remain as
they are, with a general mistrust of
neighbouring nations like Pakistan and
China
Economy ▪ India’s GDP growth rate recovers in
around 2022 with Automotive sector
recovering some of the market share
post-COVID, but the demand is still not
as good as pre-2018, with the industry
witnessing slowing growth
▪ GDP per capita grows at the current
growth rate of around 4%, thus
increasing consumer buying power but
not at a rapid rate
▪ The Indian Rupee stays at around
72Rs/$ and does not decline further
but the government can depreciate or
appreciate the rupee to favour export
or import
▪ The CAD remains at around 1.5-2%,
the government decides to keep the
import tariffs constant
▪ EV adoption becomes popular with
government providing support, but
the development is not as rapid and
takes about 15-20 years from now to
be the norm
Legal ▪ The government maintains its ▪
condition for firms from neighbouring
(Regulations &
countries looking to invest to seek
Taxes) approval, maintains current FDI
regulations, with select sectors having
100% FDI through automatic routes
▪ The government keeps the GST tax
rate and cess constant at present
levels, because of Fiscal Deficit being ▪
constant at around 7%
▪ The government takes an environment
friendly stance by pushing EVs like it is
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development is costly. It is better to invest in
employment generation (tangible) and other
select projects that show quick impact
▪ Local partnerships: Due to nationalist
rhetoric, it is necessary to seek help of local
partners through JVs to win the support of
both public as well as the government
▪ Build invaluable status: When the economic
climate is not very certainly positive and
there is doubt regarding the future demand
and buying power of people, it is necessary
to shield the firm against the slow GDP
growth rate. Therefore, investments in
conventional automobile products should be
kept minimum as they are cyclical in nature.
EV products can be useful as they are less
cyclical but heavy investment without
making the government dependent on the
firm’s technology (infra-wise) can be risky as
economic downturn can cause lack of focus
on EVs.
▪ Currency risk sharing: Uncertainty with
respect to whether the government will be
pro-export or pro-import makes currency risk
sharing imperative and firm should exercise
its bargaining power in terms of setting the
base rates in these currency risk sharing
agreements (futures, swaps etc)
▪ Local borrowing: Local currency
denominated loans should be the preferred
currency to pay the expenditures incurred,
thereby minimizing the foreign currency
accounts payable. Matching of payment
streams with same currency should be done
to the extent possible to fight exchange rate
risk
Tax risk mitigation: As chances of tax rates
getting changed is not high but still there, it’s
better to have minor contracts in place to
restrict the government from doing so easily.
In case of violations, proper arbitration
clauses with arbitration centres like
Singapore or London can be placed to
maintain & enforce international standards
Labour law risk mitigation: Current laws are
not so business friendly when it comes to
manufacturing heavy industries. It is
necessary to make minimum wage contracts
with reasonably long durations so that
 doing right now, with lower taxes and
subsidies
▪ The government stays consistent with ▪
its regulations and emission norms
▪ Taxes on automobiles remain constant
▪ Labour Laws and IP Protection laws
remain the same
Pessimistic Scenario: Risk Mitigation
Scenario Scenario Details & Risks
Drivers Involved
Demographics ▪ The middle-class segment sees
negative growth with growing
and Politics population, thus signalling increasing
poverty and less buying power among
the population
▪ The Labour Force Participation Rate
further declines from its present rate
to around 40% by 2035, thus signalling
a large percentage of working age
population out of the labour force,
human capital investment remains
ignored, making the available labour
force unemployable
▪ The government tries to bring in
economic nationalism by placing curbs
on Foreign Investment and solely
favouring local or government
businesses as a political tool to remain
in power.
▪ A significant rise in Xenophobia and
Nationalism, due to various
geopolitical measures, making it
impossible for Chinese or Pakistani
firms to conduct business in India
owing to government bans, people’s
boycott, etc.
Economy ▪ The economy of India never recovers
and GDP continues contracting for the
coming years. The Automotive sector
slowdown gets further aggravated
post-COVID due to dismal economic
growth and not enough disposable
income
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government doesn’t raise the minimum
wage frequently
Import duty risk mitigation: When the govt
is doing well, it could shift its policy to
promote export and thus linking its revenue
source (import duty) to exchange rate might
pull the government from doing so by
depreciating its currency
Risk Mitigation Strategy
▪ Strong Political Risk Insurance: As political
risks are high with strong chances of
expropriation, it is imperative to invest in a
very strong political risk insurance even if it’s
very costly. Here emphasis should be on
depth of coverage (% of losses covered by
insurance) than the hefty premiums and
down payments involved, which of course is
justified due to extreme scenarios.
▪ Strong local participation: Very strong local
partners who can influence policies with the
government is vital for survival. Of course,
this will be at the expense of reduced royalty
rates (sacrificing profits)
▪ Minimal Developmental Assistance: When
economy is on a severe downturn,
development projects are not just expensive
but also not worth the efforts due to low
market prospects. It becomes vital to invest
in employment generation when
unemployment is on peak. Whenever the
firm decides to invest on development, it
could be through the assistance of strong
local partners
▪ Sell technology: When economic climate is
very poor with downward trends, it is risky to
invest in conventional automobile products
as their demand will be minimal. Moreover,
government might not support innovation
like EVs and with minimal government
support, they remain expensive. Therefore, it
 ▪ GDP per capita stops growing and
starts decreasing at around 1-2% Y-o-Y
▪ The Rupee crashes and reaches around
100Rs/$ owing to rising foreign debt
and dwindling forex reserves
▪ The CAD dwindles to about 5-7% or the
regime pushes self-sufficiency, forcing ▪
the government to raise tariffs to
desist imports
▪ Local
Legal ▪ The government outright bans firms ▪
from neighbouring countries to invest
(Regulations & in India, or reduces the allowed FDI
Taxes) percentage for these firms forcing
them to sell part or all of their stake ▪
▪ The government introduces a higher
tax slab of around 35% or increases
cess because of growing Fiscal Deficit
▪ The government pushes environment
friendly options aggressively through
increased taxes and cess on polluting ▪
vehicles
▪ Taxes on Petrol/Diesel run vehicles are
increased to promote EVs
▪ Labour Laws are strengthened, IP
Protection laws are diluted
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is better to do EV business in an export model
with no fixed costs (no plants/factories) in
India. If infrastructure investments are to be
made, it should be through sale of
technology, thereby transferring the risk to
government
Currency risk sharing: Uncertainty with
respect to whether the government will be
pro-export or pro-import makes currency risk
sharing imperative and firm should exercise
its bargaining power in terms of setting the
base rates in these currency risk sharing
agreements (futures, swaps etc)
borrowing: Local currency
denominated loans should be the preferred
currency to pay the expenditures incurred,
thereby minimizing the foreign currency
accounts payable. Matching of payment
streams with same currency should be done
to the extent possible to fight exchange rate
risk
Tax risk mitigation: Mutual Agreement
Procedures (MAP) can be used to fight the
uncertainty and gain long term tax rate
assurances
Labour law risk mitigation: Garnering
support from the other labour intensive
foreign businesses in India to take labour
arbitration violations in global front is the
only measure when labour outrages and
changes in wage rate contracts are common.
Govt. FDI policy risk mitigation: Creating
dependence on the firm for EV technology
could help the firm fight its case. In case of
normal products, it is better to either quit the
business or consider this just like another
market without any sunk cost investments
Sources:

• https://www.lowyinstitute.org/sites/default/files/documents/Sterland%2C%20Managing%20economi
c%20risk%20in%20Asia_WEB.pdf
• https://pocketsense.com/manage-economic-risk-6688781.html
• https://www.investopedia.com/articles/investing/041916/3-strategies-mitigate-currency-risk-
eufx.asp
• https://rmid-oecd.asean.org/project-risks-mitigation/risk-mitigation-instruments/commercial-risk-
mitigation/exchange-rate-risk-mitigation/
• https://www.yourarticlelibrary.com/politics/10-different-ways-in-which-political-risk-can-be-
managed-investment/5772
• https://www.marsh.com/us/insights/risk-in-context/four-strategies-for-managing-global-political-
risk-2016.html
• https://www.edc.ca/en/blog/managing-political-risks.html
• https://www.mossadams.com/articles/2020/07/cash-repatriation-and-investment-strategies
• https://www.investopedia.com/terms/c/currency-risk-sharing.asp
• https://iveybusinessjournal.com/publication/managing-risk-and-protecting-intellectual-property/

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