Ghotala.in

India is rarely as shiny as its fans insist. The $1bn fraud perpetrated by Satyam Computer Services will not only throw the $40bn software and outsourcing industry into a tailspin, it will also raise disturbing questions about the risks of doing business in India - and even the sustainability of the country’s much-vaunted growth miracle.

Only a few months ago, India saw itself as relatively immune from the global credit crisis. Some officials patted themselves on the back for going slow on liberalising capital markets, crediting their prudence as yet further evidence of the country’s inexorable rise. But India now has a credit crunch of its own. Exporters are hurting and threatening to lay off 10m workers. Terror attacks on Mumbai have cast into doubt the competence of the security apparatus and shaken business and consumer confidence. No one can still be under the illusion that anything like 9 per cent economic growth is achievable this year, and probably next. The growth rates of recent years might yet come to be seen as a high-water mark.

Like many white-collar frauds, that of B. Ramalinga Raju, Satyam’s founder, started out small. He says it began with an attempt to cover up one disappointing quarter but then got seriously out of hand - in spite of the fact that Satyam’s board was stuffed with India’s business elite. This must raise questions about Indian corporate governance, as well as the credibility of companies’ balance sheet and auditing oversight. Overhauling auditing rules is now a matter of urgency.

Of course, India is hardly alone in such failings, as US and other regulators are in a position to appreciate. Satyam, moreover, was audited by PwC and listed in New York and Amsterdam, as well as Mumbai.

But India, with a per capita income of less than $1,000, has more to prove. In spite of its poverty, it has sold itself as a country to which Fortune 500 companies can entrust sensitive data, banks their back offices and even patients the production of medicines. Its extraordinary success in IT over the past decade was based on the trust and credibility it established with globalised companies; the Satyam scandal has now put that at risk.

Outsourcing companies, furthermore, are keen to move up the value chain; to outsource some of their own functions and even to start acquiring the western companies whose businesses they help run. These ambitions are laudable. But like India itself, whose economic success story is built on extremely rickety social and infrastructural foundations, such grand designs can also smack of hubris.