Corporate Governance and India’s Industrial Strategy

When a company’s own chairman confesses to cooking the books for years and nobody on the board noticed, something is deeply broken in how businesses are governed. India has faced exactly this situation, and the problems run far deeper than one scandal. At the same time, India’s ambition to become a global manufacturing powerhouse faces a different set of challenges: outdated regulations, slow technology adoption, and an industrial ecosystem that has not yet caught up with the world’s best. Both stories are connected: the governance failures that erode investor trust and the industrial strategy that needs that trust to succeed.

Corporate Governance: Where India’s Companies Fall Short

Corporate governance (the system of rules, practices, and processes by which a company is directed and controlled) is supposed to ensure that businesses operate transparently, treat shareholders fairly, and remain accountable. In India, however, several high-profile failures have revealed serious gaps.

Scandals That Exposed the Cracks

Two cases stand out as turning points in the conversation about corporate governance in India:

• The Satyam scandal (2009) : Ramalinga Raju, the founder chairman of Satyam Computers, publicly confessed to manipulating the company’s financial accounts over an extended period. The scale of fabrication was staggering: fictitious cash balances, inflated revenues, and invented profits. What made it worse was that multiple layers of oversight, auditors, independent directors, and regulators, all failed to catch the manipulation until the chairman himself came forward.

• Concerns at Infosys : Even at Infosys, a company long regarded as a gold standard for governance in India, the company’s own founders raised concerns about declining transparency and weakening governance practices. If governance standards could slip at a company with Infosys’s reputation, the problem was clearly systemic rather than limited to a few bad actors.

Why Governance Keeps Breaking Down

The problems sit at multiple levels, from the boardroom to the regulatory framework:

At the organisational level, three issues recur across Indian companies:

• Nepotism in board appointments : Board positions are frequently filled based on personal connections, family ties, or loyalty to the promoter group rather than professional competence. When board members owe their seats to the people they are supposed to oversee, meaningful accountability becomes impossible.

• Non-transparent policies : Internal decision-making processes in many companies lack transparency. Information does not flow freely to all stakeholders, making it difficult for investors and employees to assess whether the company is being run in their interest.

• Promoter dominance : In the Indian corporate landscape, promoters (the founding individuals or families who retain controlling stakes) wield disproportionate influence. Their decisions often override the views of professional managers and board members, effectively concentrating power in very few hands.

The Problem with Independent Directors and Minority Shareholders

Independent directors (board members who have no material relationship with the company and are meant to provide unbiased oversight) are supposed to be the check on management excess. In practice, they often lack genuine independence. Since promoters typically influence who gets appointed, these directors may hesitate to challenge the very people responsible for their position. Board meetings may not happen regularly enough for independent directors to stay informed and engaged.

Minority shareholders (individuals or small investors who hold a relatively small portion of a company’s shares) find their role similarly limited. Promoter groups and large institutional investors dominate voting and decision-making. Small shareholders rarely have the collective power to influence management, even when their interests are being overlooked.

Regulatory Gaps and Broader Structural Issues

The role of regulators, such as SEBI (Securities and Exchange Board of India), is critical but often stretched thin. Effective regulation requires both strong rules on paper and consistent enforcement on the ground. The Satyam case demonstrated that even existing rules were insufficient to prevent large-scale fraud when enforcement was weak.

Beyond regulation, two structural issues hold India back:

• Executive compensation : Salaries in Indian companies, particularly at the senior management level, tend to lag behind global standards. This can make it harder to attract and retain top talent, especially for roles that require global experience and expertise.

• Absence of large Indian MNCs : India has relatively few truly large multinational corporations compared to economies of similar size. Building globally competitive companies requires governance structures robust enough to operate across jurisdictions, a capability that remains underdeveloped.

Industry@75: A Roadmap for Manufacturing Growth

While governance problems slow down existing companies, India’s broader challenge is expanding its manufacturing base to match its economic ambitions. The Industry@75 framework was conceived as a roadmap to achieve this, timed to coincide with 75 years of Indian independence.

Two Clear Goals

The framework sets out two objectives:

1. Double the growth rate of the manufacturing sector : India’s manufacturing has grown, but not fast enough to absorb the country’s young workforce or reduce dependence on imports in critical sectors.

2. Promote planned adoption of Industry 4.0 : Technologies like artificial intelligence (computer systems that can perform tasks normally requiring human intelligence), data analytics (the process of examining data sets to draw conclusions), and other advanced tools, collectively called Industry 4.0, are reshaping manufacturing worldwide. India needs to adopt them deliberately rather than playing catch-up later.

What the Government Has Already Done

India is the fifth largest manufacturer in the world, and the government has launched several initiatives to push this further:

• Make in India Action Plan : Targets increasing manufacturing’s contribution to 25 percent of GDP, up from around 15-17 percent.

• Startup India : Promotes entrepreneurship and nurtures innovation by providing easier registration, tax benefits, and mentorship support for new ventures.

• MUDRA and Stand-up India : Both focus on making credit accessible. MUDRA (Micro Units Development and Refinance Agency) provides loans to micro and small businesses, while Stand-up India targets entrepreneurs from scheduled castes, scheduled tribes, and women.

• Recapitalisation of public sector banks : The government has injected capital into PSBs to restore their lending capacity, particularly for MSMEs (Micro, Small and Medium Enterprises) that depend heavily on bank credit.

• Industrial corridors and infrastructure : Major projects like the Delhi-Mumbai Industrial Corridor have been launched to create world-class infrastructure connecting manufacturing hubs with markets and ports.

• FDI liberalisation : The foreign direct investment regime has been substantially opened up. However, a sobering comparison remains: India receives only about 25 percent of the FDI that China attracts and just 10 percent of what the USA receives. The gap shows how much further India needs to go.

• Ease of Doing Business : The Department of Industrial Policy and Promotion (DIPP) has been engaging with states and union territories to improve business conditions, though challenges persist.

Five Constraints Holding Manufacturing Back

Despite these efforts, several structural problems continue to slow progress:

• Regulatory uncertainty : Past policy unpredictability and regulatory risks have eroded investor confidence. When businesses cannot trust that the rules will remain stable, they hold back capital.

• Investment slowdown : Fresh investment has been on a cyclical decline since 2011-12, creating a self-reinforcing problem where low investment leads to low growth which further discourages investment.

• Technology adoption gap : Adopting Industry 4.0 is significantly harder for SMEs (Small and Medium Enterprises) than for large organised manufacturers. SMEs lack the financial resources, skilled workers, and reliable digital infrastructure needed to implement AI and data analytics. Issues like data security, data reliability, and communication stability add further barriers.

• Weak exports and insufficient domestic demand : India has not achieved export-driven industrial growth. At the same time, domestic demand alone may not be large enough to sustain high-value manufacturing at scale. This creates a chicken-and-egg problem: without exports, manufacturers cannot achieve the economies of scale needed to become competitive.

• Persistent ease-of-doing-business challenges : Despite India’s improving global ranking, ground-level difficulties remain. Getting construction permits, enforcing contracts, paying taxes, starting a business, and trading across borders continue to be pain points for investors. This is true at both the central and state levels.

The Way Forward: Building a Manufacturing Ecosystem

The Industry@75 framework lays out a comprehensive set of recommendations to address these constraints:

• Leverage public procurement as a catalyst : The government can use its massive purchasing power to build domestic manufacturing capacity. Mega projects such as Sagarmala (port-led development), Bharatmala (highway network), industrial corridors, and the Pradhan Mantri Awas Yojana (PMAY, affordable housing) can stimulate manufacturing, but only if the projects are structured so that demand is aggregated strategically rather than scattered across uncoordinated contracts.

• Single-window clearance system : Every state should have a single-window system that provides one point of contact between the investor and government. Instead of visiting dozens of departments for different licences and approvals, an investor deals with one window. This alone can dramatically cut delays and reduce opportunities for corruption.

• Accountability in approvals and inspections : Inspection bodies, testing laboratories, and other approval authorities need a formal system of accountability. When these stakeholders have clear performance standards, the approval process becomes faster without sacrificing quality.

• Real-time project monitoring : A dedicated portal should track all projects above a certain size threshold so that roadblocks can be identified and addressed as they arise, not months later when the damage is done.

• Self-sufficient manufacturing clusters : Rather than scattering industrial development, the focus should be on building concentrated clusters of manufacturing competence. These clusters would offer single-window clearances to entrepreneurs and investors, while industrial corridors would address the underlying infrastructure and logistics gaps.

• Connecting government, industry, and academia : A stronger three-way link is needed so that the education system produces workers with the skills manufacturers actually need. Without this connection, India risks training people for yesterday’s jobs while today’s factories go understaffed.

• E-commerce as a growth engine : Online commerce can drive overall economic growth over the next decade by generating new demand, expanding the market reach of manufacturers (including those in smaller towns), creating employment, and bringing greater transparency to business transactions.

• Harmonising quality standards : Indian quality and product standards need to align with global benchmarks. When Indian standards differ from international ones, exporters face rejection, additional testing, or non-tariff barriers. This lack of harmonisation (the process of making standards consistent across countries) has directly hurt Indian exports and prevented the country from fully benefiting from the trade agreements it has signed.