Expand political risk insurance to help our businesses go global
Outbound FDI is crucial for Indian firms to expand globally but coverage gaps in what local insurers offer must be plugged
International news in India at the beginning of 2024 was dominated by a publicized phase of diplomatic tension between India and the Maldives following Prime Minister Narendra Modi’s visit to the Union territory of Lakshadweep. This was followed by an order by the government of Maldives asking Indian troops to leave the archipelago nation.
However, this wasn’t the first time the relationship between the Maldives and India has been disturbed. If we go back a decade, in 2013, Malé had asked Indian infrastructure giant GMR to leave. After protracted arbitration, GMR was awarded $270 million in 2016 against claimed losses of $800 million.
Jindal Steel faced a similar fate in Bolivia when it had to walk out of a multi-billion-dollar project following a scandal over encashment of bank guarantees by the Bolivian government. The Indian company was awarded $22.5 million against claimed losses of over $100 million.
Given such instances, Indian industries wanting to spread their wings beyond Indian shores have been seeking political risk insurance (PRI).
Despite market demand for PRI, the question is whether this should be a significant policy matter, given the robust growth of India’s economy and growing set of domestic and international investors. There is general euphoria about the India story and the arrival of Amrit Kaal—a propitious phase for turning India into a developed country. The continued buoyancy of Indian markets in the wake of the covid pandemic, slowdown in China and conflicts in Ukraine as well as Palestine has demonstrated the confidence of investors in the India story. Strong domestic markets, of course, are indispensable to a robust economy.
However, to transform India into a global economic power, Indian businesses must expand their footprint beyond domestic markets. Outbound foreign direct investment (FDI) will be instrumental in accomplishing this business expansion. India’s outward FDI imperative may be understood from two perspectives:
One, India and Indian businesses must have a strategy to identify and capture markets abroad through forward integration in largely untapped and underserved regions such as Africa and South America. Many of India’s small technology-enabled companies could move quickly into global markets. For these ‘born global’ startups and micro, small and medium enterprises (MSMEs), outward FDI may be a critical means of business expansion.
Two, in a globalized world, sourcing of raw material can play a significant role in businesses gaining a competitive advantage. Therefore, unsurprisingly, some Indian companies have invested in facilities across the globe in pursuit of such an advantage while expanding operations. The future expansion strategies of Indian businesses must stay cognizant of the emergence of some developing nations as major suppliers in the coming years. The drive for decarbonization across industries has been driving demand for critical minerals that go into clean-tech solutions from such countries. This presents an opportunity for backward integration by Indian businesses through outward FDI.
The outward FDI path, however, is not free of hurdles. Some relatively untapped markets are particularly prone to high political risk, unfortunately. Given this backdrop, PRI is a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments in developing countries. It also eases the access of companies to finance on good terms.
In India, some private insurers and ECGC Ltd, a state-owned insurer, provide PRI. However, there is a major challenge that contributes to an observed under-utilization of PRI by Indian businesses as an effective tool for expansion: the low availability of US dollar-denominated PRI policies.
Rupee-denominated PRI policies are not adequately useful for businesses as the Indian rupee has been depreciating in value against the US dollar for years. Thus, the assured sum may not be sufficient to cover losses over extended periods.
Both backward and forward integration are long-term endeavours and necessitate insurance policy coverage for longer periods of time. Also, the frequent renewal of short-term rupee-denominated policies issued by Indian insurers is cumbersome and perhaps motivates businesses to opt for risk cover from international insurers that operate overseas.
Globally, most national PRI providers offer risk coverage in foreign denominated currencies. This includes the UK, where insurers offer 60-plus local currency options for PRI. For Turkey, its Exim Bank offers coverage principally in dollars and euros, although it also offers many other options, like the Japanese yen and British pound. In Japan, specific policy conditions are laid out for insurers to provide foreign currency denominated payouts; these include dates for applicable foreign-exchange conversion rates for such payments.
To facilitate the growth of Indian businesses outside India, India must overcome this problem associated with political risk insurance.