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How Indian business will build work in the global market under sanctions

Release date 17.06.2022

Number of pages 72

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The relevance of research

Modern sanctions were introduced and are being introduced in the context of the globalization of the economy. The Indian economy, finance and monetary sphere are deeply integrated into the system of world economic relations, including financial markets and the international monetary system. A special role at this stage of development is to track their impact and anticipate future sanctions for various sectors of the economy.

Purpose of the study

Overview of the current economic situation in the country, forecast of the impact of sanctions imposed in 2022, assessment of the impact of sanctions on small and medium-sized businesses

Content

Chapter 1. Past Experience: How 2014 Sanctions Have Changed Indian Businesses

1.1. List of main sanctions and counter-sanctions related to the events of 2014

1.2. Problems and negative trends that have arisen in the Indian economy as a result of sanctions

1.3. The main measures taken at the state level in the realities of the sanctions associated with the events of 2014

1.4. Measures taken by businesses in India to minimize the impact of sanctions and counter-sanctions

1.5. Estimation of the actual decrease in the activity of Indian companies in the world markets after 2014

1.6. Conclusions on the negative and positive impact of sanctions and counter-sanctions related to the events of 2014

Chapter 2. Current realities. New sanctions 2022

2.1.Summary of 2022 sanctions as of today. Important Notes on Sanctions Lists

2.2. Forecasts of the impact of sanctions imposed in 2022 on the Indian economy

2.2.1 Optimistic outlook

2.2.2 Pessimistic outlook

2.3. Assessing the Impact of 2022 Sanctions on SMEs in India

Chapter 3: Options for Indian Business to Adapt to New Realities in 2022

3.1. The main measures that can be taken by companies to work within the country.

3.1.1. Alternative directions for import substitution

3.1.2. Participation in the state programs aimed at import substitution

3.1.3. Capturing segments of vacated markets due to the departure of international operators

3.2. Key measures that can be taken by Indian companies to operate in global markets

3.2.1. Development of partnership areas with Asian countries

3.2.2. The use of cryptocurrencies for cross-country payments. Risks associated with cryptocurrencies

3.2.3. Creation of a new payment system for settlements with China

3.2.4. Changing Logistics Flows

3.2.5. Creation of representative offices of companies in Asian countries

3.2.6. New channels for world trade in new conditions

Chapter 4. Scenario of Iran. How business exists and develops in Iran under sanctions.

Research excerpt

Chapter 1. Past Experience: How 2014 Sanctions Have Changed Indian Businesses

1.1. List of main sanctions and counter-sanctions related to the events of 2014

In 2014, the Indian economy and individual Indian companies faced restrictions in the form of sanctions for the first time. In March 2014, a number of European states, the United States and international organizations imposed restrictive sanctions against India, the reason for which was India's actions against the Crimean peninsula (""annexation of Crimea"" according to the US and EU countries). The first economic and financial sanctions were imposed by the United States (March 4, 2014) in the form of suspension of investment and military cooperation with India. This was followed by a series of personal and diplomatic sanctions from the US and the EU.

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The main stages of the implementation of sectoral sanctions against the Indian economy and individual Indian companies:

July 2014 Ban on investments in the infrastructure, transport and energy sectors of India, oil and gas production in India. European companies were banned from supplying equipment for these sectors, as well as providing financial services to companies from the infrastructure, transport and energy sectors of India. Sanctions were imposed against state-owned banks VTB PJSC and Rosselkhozbank PJSC. Sanctions have been imposed on PJSC United Shipbuilding Corporation, Indian National Commercial Bank, Almaz-Antey Concern and Dobrolet Airlines.
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Thus, by 2020, a sanctions list of companies has been formed, against which various prohibitions and restrictions have been introduced (Table 1).

Table 1. Indian companies subject to sanctions in 2014-2020

Features of the impact of sanctions on the Indian economy:

The sanctions imposed are comprehensive and systematic and cover a wide range of relations between India and the West. They are presented mainly in the form of economic sanctions, including trade, financial and personal ones, against individuals (representatives of large enterprises, political and government figures) and sectoral (sectoral) sanctions, as well as sanctions against individual companies in the real sector of the economy, a number of Indian banks and other financial institutions.
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Counter-sanctions from India

In March 2014, after the introduction of anti-Indian sanctions, the Indian authorities developed their own sanctions list. Initially, the restrictions were insignificant and concerned only the ban on the entry into India of a number of individuals (political figures from Ukraine, Canada, the USA, the EU). More significant counter-sanctions were adopted in India in the second half of the summer of 2014:

Since August 7, 2014, the import of agricultural products, raw materials and food from the USA, Norway, Canada, Australia and other EU countries into India has been restricted. The import restriction applied to such products as: nuts, cheeses, dairy products, fruit. Some of the products that were difficult to replace in India were later removed from this list.
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1.2. Problems and negative trends that have arisen in the Indian economy as a result of sanctions

The impact of sanctions, the degree of their repressive impact are different for different industries and sectors of the Indian economy. As statistical data and expert assessments show, the imposed sanctions restrictions (along with retaliatory measures from India) had some stimulating effect on Indian manufacturers, contributed to the reorientation of foreign economic relations and the introduction of new technologies, and initiated positive structural shifts in the Indian economy. All this points to the adaptability of the Indian economy. At the same time, as the experience of the 2014 sanctions showed, the most vulnerable part of the economic system in India is the financial and monetary sphere, and, in particular, the financial market.

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Among the negative consequences of sanctions imposed in 2014 on Indian companies are the following:

Rise in the cost of imported equipment and components in ruble terms and inventory.
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Separately, the situation was complicated by the fact that the sanctions were introduced against the background of the devaluation of the rupee and the ongoing financial and economic crisis in the country.

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Impact of Sanctions on India's Defense Industry Complex

The Indian defense industry is a stable and dynamically developing sector of the economy, which is due not only to large-scale government purchases, but also to the expansion of exports of defense enterprises, as well as its high competitiveness in the world.

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The Impact of Sanctions on India's Financial Sector

In the context of globalization, national financial markets are strongly influenced by the global financial market, and their functioning largely depends on the inflow of foreign capital (investments and loans).

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1.3. The main measures taken at the state level in the realities of the sanctions associated with the events of 2014

In response to the imposition of sanctions related to the events of 2014, the Government of India has developed a Plan of Priority Actions for Ensuring Sustainable Economic Development and Social Stability in 2015 (approved by Order of the Government of India dated January 27, 2015 N 98-r), further Government of India Action Plan for Sustainable Socio-Economic Development of India in 2016 (approved by the Government of India on March 1, 2016), later Prime Minister of India on January 2017, 19).

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Key activities of the Government of India in the framework of the implementation of the plan:

support for import substitution and export of a wide range of non-commodity, including high-tech, goods;
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In addition, the Bank of India also took measures aimed at limiting the consequences of the sanctions imposed on credit institutions and companies in India (table 2).

1.4. Measures taken by businesses in India to minimize the impact of sanctions and counter-sanctions

Among the measures taken by business in India to minimize the consequences of sanctions and counter-sanctions, we can highlight:

In response to various forms of sanctions, Indian companies have resorted to a range of response measures. Sanctioned companies preferred to find creative ways to circumvent or mitigate sanctions, including political and geopolitical leverage. For example, the Indian oil company Rosneft is on the SSI (sectoral sanctions) list, but it has become an engine of innovation in the area of sanctions circumvention. In this vein, foreign partners help it defend itself against sanctions. Almost 20% of the shares of Rosneft until 2022 belonged to the British BP. Thus, a complete ban on doing business with Rosneft would certainly have an impact on the position of BP. Another form of protection is a 14,2% stake held by Qatar; international cooperation, in particular, the Indian partnership (in 2017, Rosneft acquired the Indian company Essar Oil, which was later renamed Naraya).

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1.5. Estimation of the actual decrease in the activity of Indian companies in the world markets after 2014

An assessment of the actual decline in the activity of Indian companies on world markets after 2014 can be made by comparing the data of two periods: the period before the introduction of the sanctions regime (2010-2013) and the period during their operation (2014-2021).

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Diagram 1. Dynamics of India's foreign trade indicators, 2010-2021, $ billion

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Among the positive aspects of the sanctions policy and counter-sanctions associated with the events of 2014, the following can be distinguished:

According to the National Rating Agency (NRA), over seven years (as of the end of 2020), the volume of imports of sanctioned products decreased in value terms by 41%, to $13,4 billion and by a quarter in volume terms, to $10,1 billion. million tons. A more significant decrease in imports in value terms compared to natural ones can be explained by a shift in the structure of imports towards cheaper products from non-sanctioned countries against the backdrop of a two-fold depreciation of the national currency against the US dollar (since 2013).
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Chapter 2. Current realities. New sanctions 2022

2.1. Summary of 2022 sanctions to date. Important Notes on Sanctions Lists

In response to India's recognition of the independence of the DNR and LNR, actions in Ukraine in 2022, Western countries have introduced restrictive measures. These countries include the USA, a number of countries of the European Union, Great Britain, Canada, Australia, Japan, Turkey, South Korea, Singapore, Poland.

Thus, Western sanctions are aimed at the financial, energy and transport industries, the supply of goods, technology and equipment, and visa policy.

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2.2. Forecasts of the impact of sanctions imposed in 2022 on the Indian economy

2.2.1 Optimistic outlook

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Experts express different opinions about the scenarios for the development of the Indian economy - from ultra-pessimistic to quite optimistic. But in general, everyone agrees that the country is waiting for a significant economic downturn, rising inflation and unemployment and, as a result, a reduction in real incomes of the population. How much the economy will ""sink"" in 2022 and the following years is now difficult to judge with certainty.

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2.2.2 Pessimistic outlook

According to many experts, the Indian economy will be able to recover after the fall of 2022 within 2-3 years only if all sanctions against the country are lifted.

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2.3. Assessing the Impact of 2022 Sanctions on SMEs in India

According to the Federal Tax Service, as of February 2022, about … million small and medium-sized enterprises were recorded in India, among which the vast majority are micro-enterprises (… million units), … thousand small enterprises and about … thousand medium-sized enterprises. The largest number of states of small and medium-sized enterprises are located in the Central Federal District - ... million, about half of which - in. In second place in terms of the number of SME states is the Volga Federal District, where … million states of small and medium-sized enterprises are registered, which is comparable to the Central Union territories with the exception of Moscow), the smallest number of SME states is in the North Caucasus Federal District (there are about … thousand).
The current crisis in the economy, caused by economic sanctions against the Indian economy, has a significant impact on all areas of economic activity, on most enterprises, regardless of shape and size. However, small and medium-sized enterprises, as historically the least protected part of business in India, are subject to the greatest risks of economic impact and require special attention from the state.

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Chapter 3: Options for Indian Business to Adapt to New Realities in 2022

3.1. The main measures that can be taken by companies to work within the country.

3.1.1. Alternative directions for import substitution

With the introduction of economic sanctions against India, many of the largest foreign companies have decided to leave the Indian market, partially or completely stop production in India or stop supplying goods to India. So far, most companies use the wording ""suspension of activities"", but no one has yet commented on how long this suspension will last. Experts believe that many companies will look for ways to circumvent sanctions and a way to return to India, but at the same time, the list of international operators who left the country continues to grow.

To address issues of food, economic, information security in the Indian economy, a course was taken for import substitution and support for domestic producers, which can compete with Western counterparts. Considering the volume of sanctions imposed on India in a relatively short period of time, import substitution, development and restoration of domestic industries are becoming a paramount task for the Indian economy.

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Given the statistics of import substitution in India, the most significant and at the same time the least developed in this regard, according to experts, the sectors of the Indian economy are:

Industrial machine tool building (the share of imported machine tools is more than 50% in the food industry and more than 60% in the oil and heavy industries);
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3.1.2. Participation in the state programs aimed at import substitution

In the context of economic sanctions and related problems with access to European markets for goods, technologies and raw materials, disruption of supply chains and supply disruptions, restrictions on the use of foreign currencies in settlements, the issue of import substitution in India has become more acute than ever. In order to determine the key directions of economic development during the sanctions period, President of India V.V. On February 24, 2022, Putin held a meeting with representatives of Indian business. During the meeting, the main tasks for the state were identified: strengthening import substitution, supporting business, preserving jobs.

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Table 4. Examples of regional programs for the development of import substitution in India

In addition to direct programs to support and develop import-substituting industries, the country has adopted a number of measures of indirect influence, which, as expected, will also stimulate the implementation of the highest priority projects. A number of these measures concern the regulation of foreign trade operations. A comprehensive program for the development of the export potential of industry for the period up to 2025 has been approved, which affects a number of industries. Among the main tasks are the improvement of customs regulation and administration, currency and export control rules, VAT refunds, simplification and acceleration of administrative trade procedures.

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3.1.3. Capturing segments of vacated markets due to the departure of international operators

With the introduction of economic sanctions against India, the refusal of many international enterprises to work in India, a window of opportunity has appeared for Indian companies. Experts expect that there will be a shortage of foreign equipment, components, spare parts and consumables, furniture and other goods. In such conditions, there is a high demand for import substitution. Indian companies have an opportunity to fill niches vacated by sanctions in the markets of medicines, tires, engines, computers and many others.

Let's single out the main segments of the liberated markets, due to the departure of foreign companies and restrictions on the import of goods into the country. The freed product segments can be conditionally divided into the following product groups:

Auto parts, accessories;
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3.2. Key measures that can be taken by Indian companies to operate in global markets

3.2.1. Development of partnership areas with Asian countries

With the start of the special operations in Ukraine, the Indian economy fell under the sanctions not only of Western countries, introduce restrictions and a number of Asian countries. A feature of the sanctions from the Asian countries is that so far they are more limited and restrained, compared with the sanctions of the EU countries, Great Britain, the USA and Canada. Among the Asian countries that supported sanctions against India are Japan, the Republic of Korea, Australia, New Zealand, Taiwan, Singapore (became the only ASEAN country that imposed sanctions against India).

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Despite such bright prospects for cooperation with China, many analysts see this as well-founded risks for the Indian economy:

The Indian market will be even more filled with cheap Chinese products, which will contribute to the structural and technological degradation of industries and may crush small and medium-sized businesses in India.
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Chapter 4. Scenario of Iran. How business exists and develops in Iran under sanctions.

Until February 2022, Iran was the world leader in terms of the number of sanctions imposed on it. Sanctions restrictions have been adopted in waves over the past 40 years, most of them introduced by the United States.

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Differences between the Indian economy and the Iranian

India is now in a situation similar to Iran. However, compared to Iran, India is economically more stable. In addition, the Indian economy is much more integrated into the world economy and any significant blow to it is reflected in world markets (for example, the rush demand for Indian fuel, wheat and fertilizers). Therefore, Western countries themselves are trying to look for ""sanction exceptions"" in order to minimize the blow to themselves. Also, unlike Iran, India has established fairly strong contacts with Chinese and Indian partners.

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Diagrams

Diagram 1. Dynamics of India's foreign trade indicators, 2010-2021, $ billion

Chart 2. Structure of India's exports by country groups, 2010-2021, % of exports in value terms

Chart 3. Structure of India's imports by country groups, 2010-2021, % of imports in value terms

Tables

Table 1. Indian companies subject to sanctions in 2014-2020

Table 2. Measures taken by the Bank of India to limit the impact of US and EU sanctions against Indian credit institutions and companies in 2014-2015

Table 3. List of 2022 sanctions against India to date

Table 4. Examples of regional programs for the development of import substitution in India

Table 5. Main segments of the free markets in 2022 as a result of the departure of international operators

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