Moodys initially downgraded the country in early 1996 due again to instability as it felt that the fall of the Deve Gowda government was imminent. As political stability is critical to a country's growth and by extension to companies, the Bharatiya Janata Party took stability as their central point in their 1997 election manifesto. let us look at this in more detail.

The political equation

Astable political environment is necessary for steady balanced growth. If the country is ruled by a majority government and takes decisions for the long term development of the country, industries and companies will prosper. Instability causes insecurities especially if there is the possibility of a government being ousted and replaced by another that holds diametrically different political beliefs. Moods downgraded India initially during Mr Deve Gowdas's term of office on the issue of stability. It proved true and Mr Gowda's government collapsed to be followed by Mr Gujral's tenure which also had a quick demise.

Such instability shakes the very foundation of investor/international/national confidence. This is why, as was mentioned earlier, that the BJP has made stability the central issue of its campaign.

Another example is Sri Lanka - a country in the grips of civil war. The north of that country was once thriving and prosperous. No longer. That part of the country is controlled by the Tamils - there isno industry and little economic activity. For several years the economy of Sri Lanka suffered as tourists went elsewhere and exports fell.

Kenya had a disastrous 1997. There was violence in Mombasa. It was also election year and there was an acknowledgement that President Arap Moi may not get elected. Consequently aid was held back - the shilling depreciated and inflation rose. Tourist revenues too fell significantly to the detriment of the country.

No industry can grow and prosper in the midst of political turmoil.

Restrictive practices

Restrictive practices or cartels imposed by countries can affect companies and industries. The United States of America has restrictions regarding the imports of a variety of articles like textiles, etc. Licenses are given and amounts that may be imported from companies and countries are clearly detailed. India has a number of restrictions on what may be imported and at what rate of duty. This to an extent determines the prices at which the goods can be sold.If domestic industry is to be supported, the duties levied may be increased resulting in imports becoming unattractive.

Alternatively the reduction of duties can result in imports becoming cheaper to the possible detriment of Indian industry. The lowering of duty in the first phase of liberalisation led to the near demise of the mini steel industry in India. It is this fear that prompted the formation of the Bombay Club which wants restrictive protection for Indian industry. Bankers on account of the effect restrictive practices or its removal can have on a company, always check how sensitive the company is to these.

The threat of nationalisation The threat of nationalisation is a real threat in many countries - the fear that a company may become nationalised.

Historically (with very few exceptions), nationalised companies are less efficient than their private sector counterparts. Nationalisation in India ruined coal, insurance and banking.

If one is dependent on a company for certain supplies,nationalisation could result in supplies becoming erratic and the likes. Similarly, if this fear exists industries will not attract investment and there could be a flight of capital to other industries/countries.

At present the issue is the reverse in India - the possibility of privatisation. This, by large, tends to the belief that both employee and company profitability will improve as was demonstrated by British Airways which when government owned was a loss-making behemoth. It turned around and is being acclaimed as efficient and excellent after it became privatised.

Taxation The level of taxation in a country has a direct effect on both companies and the economy. If tax rates are low, corporate profitability rises as the cost of their purchases will be lower and their after tax income higher.

Additionally as people consequently have more disposable income they have an incentive to work harder and earn more money. and an incentive to buy which results in greater demand for goods. This is good forthe economy and for companies. It is interesting to note that in every economy there is a level between 35 percent to 55 percent where tax collection will be the highest.

While tax rates may go up collection will decline. This is why it was argued that the rates in India must be lowered and why at the 1997 budget the rates of taxation were reduced by Mr Chidambaram. Taxes have been lowered, an amnesty scheme was offered and tax collection has never been higher.

Governmental policy

Government policy has a direct impact on companies. A government that is perceived to be proindustry will attract investment. The liberalisation policies of the Narasimha Rao government excited the developed world and they were keen to invest in India and increase their existing stakes in companies. The instability that followed, the Enron fiasoc, Cogentrix et al have made the same foreigners adopt an wait and watch stance.

Budgetary deficit

A budgetary deficit occurs when governmental expenditure exceeds itsincome. Expenditure stimulates the economy as awork is created and demand iwll increase. However, this can lead to deficit financing and inflation. India has had deficits for several years and this has not been good for the country as it can lead to disaster. IT would be wise to remember this. At present, the government is trying to keep the deficit at 4.5 percent of GDP and cutting back on expenditure for the infrastructure. The result has been disastrous for several industries such as steel /, cement and construction and for companies in these industries.

All these factors have an effect on the performance of a companay - the extent being on how sensitive a companay's profitability is to the peculiar factor.

This is why bankers pay special emphasis to a political stability and a company's sensitivity to governmental policy as it effects a company's profitability and its creditworthiness.