As Ratan Tata, chairman of the Tata Group, observed, “If you choose not to participate in [corruption], you leave behind a fair amount of business.”

Much has been written about the benefits of doing business in India — low input costs, easy access to labor and a massive consumer base. Less has been said about the ability of companies in India to thrive by bending rules, greasing palms and broadening ethical boundaries. At a time when the issue of corruption threatens the stability of the Indian government and scandals unearthed in sectors from sports to telecommunications total tens of billions of dollars, it is becoming increasingly critical for multinational managers to ask whether business success in India comes at an ethical cost.

Following  the 1991 fiscal reforms, India’s growth story is entering its third decade in dramatic fashion. Annual growth bordering on double digits, a middle class set to grow eightfold in the coming two decades and 800 million mobile subscribers are but a few highlights of the narrative that has reshaped the global business landscape. The sheer magnitude of the opportunity has brought multinational businesses racing to the subcontinent from all over the world for a slice of the burgeoning pie: In a recent survey conducted by the United Nations Conference on Trade and Development (UNCTAD), India replaced the U.S. as the second-most important foreign direct investment (FDI) destination for transnational corporations.

Swimming against the Current

Yet even a small slice of that pie has been elusive for many transnationals. Goldman Sachs India admitted that growth to date has been slow, as the company’s priority has been to protect its reputation by dealing only with clients with the highest ethical standards. The German firm Enercon, the world’s fifth-largest wind turbine manufacturer, was forced to walk away from its US$566 million joint venture after being intimidated by authorities and failing to find legal recourse to what it termed “government-abetted theft.” Even Ratan Tata admitted that officials’ expectations of bribes were the reason he did not establish a domestic airline.

Understandably, frustration abounds for foreign entrants. An extensive 2010 survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) found that only 12% of foreign companies rated the overall legal framework and regulatory mechanism as “good.” Furthermore, when asked about ground-level hassles, only 14% reported the situation as comfortable while 93% found procedural delays to be a serious concern.

In discussions with executives of multibillion-dollar companies, from Jet Airways to McKinsey & Company, it became clear that success in India requires a unique approach. Managers across industries agree that the heart of the Indian competitive advantage lies in the concept of jugaad, or, as defined by the former CEO of a leading Indian real estate group, “finding a way to your cheese.” Eighty-one percent of Indian businessmen surveyed by the Legatum Institute said that jugaad was the key reason for their success. It is this innovation through whatever means necessary, like water flowing through the paths of least resistance, that has formed the backbone of India’s growth story.

Slicing through bureaucracy, inadequate infrastructure and chaotic environments demands a unique genius — one that sometimes neglects Western ethical norms. Ethically questionable scenarios in the Indian market range from the mundane to the spectacular. Certainly, at the civic level, day-to-day business will often find one across the table from bureaucratic gatekeepers selling their signatures at monopoly prices. However, cultivating “mutually beneficial” political relationships is perhaps even more important as the deal value rises. Earlier in 2011, taped conversations released by the Indian Supreme Court detailed the role of Member of Parliament and well-known power broker Amar Singh in helping a leading commodities player, Bajaj Hindusthan Sugar, fix policy, obtain clearance and resolve legal irregularities. On the recordings, Singh assured his clients that “no one can do things for you like I do. Whatever you wish will happen, as long as I remain in power.”

The pervasiveness of jugaad in modern Indian business — and its relatively lower profile in developed Western economies — speaks volumes. To the casual observer, this juxtaposition brings to mind Kipling’s famous words, “Oh, East is East and West is West, and never the twain shall meet.” This evokes stereotypes of the unethical emerging East and the ethical emerged West, of the delta between developing and developed markets, of a necessary barrier that emerging markets will have to breach before they count themselves among the financial elite.

However, this may be far from reality.

Of Cultural Contexts and Ethical Equilibriums

Many multinational managers may wonder whether India is moving toward more “Western” business ethics or whether it has already reached a static state. While most have assumed the former, it is important to recognize the unique features of Indian culture that provide additional context.

Historically, Indian society has placed great emphasis on loyalty to the collective, be it one’s caste, village or family. This drives a culture of favors, friendship and clanship that clashes with the Western concepts of conflict of interest and pure meritocracy. The Indian ethos emerges in a survey of Indian government officials who explicitly value loyalty over competence when making hiring decisions.

Furthermore, Indian literary history fully embraces the concept of noble ends justifying dubious means. Three texts intrinsic to Indian culture and philosophy help to explain the current business landscape: the epics Ramayana and Mahabarata and the economic treatise Arthshastra.

In both the Ramayana and the Mahabharata, even gods resort to deceit and trickery to accomplish their ends. In the latter, Lord Krishna repeatedly devises “underhanded” methods to defeat the opposing army — going so far as to encourage the protagonist, Arjuna, to attack and kill an unarmed adversary.

In addition, the Arthshastra is often cited publicly by prominent politicians and businessmen as the foundation of their strategic thought. Written to advise a king on statecraft, economic policy and military strategy, the work advocates the use of deception and sometimes brutal measures for the common good. Max Weber described Machiavelli’s draconian Prince as harmless when compared to Arthshastra, whose topics range from “when a nation should violate a treaty and invade” to “when killing domestic opponents is wise.”

It may be presumptuous to view Indian culture, one that has thrived for three thousand years, through a Western ethical lens. Both civilizations have different origins and therefore, are likely to have different ethical equilibriums.

The Millstone around India’s Neck …

India’s lax ethical standards, coupled with a rigid bureaucracy and weak enforcement mechanisms, have certainly hurt the country in many ways. The causes of this fiscal pain can be seen at the government, corporate and individual levels.

Scandals in the political and business spheres seem to have become endemic in India. The infamous “2G” scandal of 2008, in which the government granted telecommunication licenses on a first-come-first-served basis instead of through an auction, is estimated to have cost taxpayers US$40 billion. This resulted in bargain-basement prices for valuable assets and precluded many eligible parties from procuring licenses. Lax corporate governance has also hurt investor confidence, as illustrated by the revelation of questionable accounting practices at Satyam Computer Services. This 2009 scandal saw US$70 million in real assets transformed into US$1 billion in imaginary assets and sent the Bombay Stock Exchange tumbling 5% in a single day.

Indicative of the ubiquity of the problem, it is estimated that US$1.5 trillion in black money — an amount far exceeding India’s GDP — is hidden in foreign banks. Individual cases help ground this issue in reality. Madhu Koda, the son of a tribal farmer, who rose to become chief minister of the State of Jharkhand, was discovered to have undisclosed assets of US$1 billion, including a hotel in Thailand and a coal mine in Liberia. Businessman Hasan Ali, accused of money-laundering and arms-dealing, owes the government US$16 billion in taxes.

As a result, the total fiscal loss is staggering. According to Global Financial Integrity, US$314 billion has flown out of India since 1991 in the form of evaded taxes, crime and corruption. Furthermore, Transparency International has ranked India 87th out of 178 countries on its Corruption Perceptions Index, and the World Bank has ranked India 134th out of 183 countries in “ease of doing business.” It is widely believed that these factors have contributed to shaky investor confidence in India, as foreign direct investment fell 31% in 2010.

… Or the Fire beneath India’s Feet?

Another perspective is to view these challenging factors — India’s lax ethical standards, rigid bureaucracy and weak enforcement mechanisms — as the fire beneath India’s feet, a crucible for Indian businesses and entrepreneurs. This crucible tempers and hones the innovative spirit and bold nature of Indian businessmen.

This crucible prompted the chairman and founder of one of India’s leading retail groups to say that in India, corruption is necessary for growth. He went on to cite the example of the “2G” scandal: Without it, had the licenses been granted by auction, mobile calls would never have fallen so quickly to two cents per minute.

This crucible also allows Indian businessmen to innovate boldly when presented with opportunities created from these challenging factors. Dhirubai Ambani embodied the spirit of using creative solutions — legal and otherwise — to create economic value. Rising from being a petrol-pump attendant to head one of the largest conglomerates in the world, Ambani exported junk in exchange for import entitlements, built internal capacities far beyond license quotas, imported massive machinery as “spare parts” and influenced favorable changes in textile and telecom laws. At the same time, he short-circuited the socialist bureaucracy to build the world’s cheapest refineries, realized his dream of making telephone calls cheaper than a postcard and helped privatize the Indian energy market. Today, the successors of his Reliance Group have a combined market capitalization of more than US$160 billion.

Opportunities created by these challenging factors have also been seized through ethical means. The microfinance industry came into being as a result of the inefficiency of government-funded financial programs designed to provide loans to lower-income households. Ujjivan Financial Services, a microfinance institution set up in Bangalore in 2004, caters to the urban poor. According to Kavitha Nehemiah, product manager at Ujjivan, “government programs are badly run, corrupt and do not reach the target audience. Additionally, banks shy away from this demographic given documentation requirements and high costs with low returns.” Ujjivan lends at a 24% rate, which is much higher than banks but lower than private money lenders that charge between 50% and 300%. As of March 31, 2011, the institution had disbursed more than US$450 million to more than 991,000 customers.

Just as notably, Indian businessmen are able to extrapolate these lessons to situations relatively unscathed by lax ethical standards, rigid bureaucracy and weak enforcement mechanisms. The characteristics forged in the Indian crucible — innovation and boldness — can swiftly become firm competitive advantages in innovation and creativity. The “one-lakh car,” the Tata Nano, made waves in the mature automotive industry and was heralded by a major news publication as “a triumph of homegrown engineering.” Although its price tag has ballooned by 40% since its introduction, it remains half the price of its closest competitor.

The Way Forward

Today’s Indian media outlets are dominated by Anna Hazare, a crusader attempting to strengthen India’s checks and balances against corruption. He headlines a national movement that has brought ethics to the forefront of India’s national consciousness and has forced the country to confront its ethical standards and explicitly choose a way forward. “This movement has convinced the youth of this country that they are active agents of change,” noted Varun Gandhi, Member of Parliament, following the end of Hazare’s 12-day hunger strike in August 2011. “A churning is taking place,” he added. “We could say it is a silent revolution, except it is not so silent anymore.”

Currently, it is incumbent on the multinational managers to realize that business in India is held to a different set of ethical rules than those found in the West. Today, success in India comes from playing by these rules. In the future, it will be up to the multinational managers to recognize that India is moving ponderously toward a new ethical equilibrium. The nation’s intersection of business and ethics is shifting, and the India trade-off likely will never look the same again.

And it will be up to the multinational managers to realize that, while the direction of this shift is inevitable, its magnitude is certainly more complicated to ascertain. Will it be a seismic shift or a minor tremor? Will it reshape boundaries or modify the status quo only slightly?

At the end of the day, the answer lies within the Indian businessman. So much of what has held him back has propelled him forward: He has been both burned and forged at the same crucible. What new equilibrium will benefit him, an­­­­d his nation, the most? And will the policymakers be able to understand and be willing to execute whatever is necessary to reach this target?

Only with time will we be able to observe this dilemma’s resolution. The multinational managers would do well to pay heed, lest they leave behind a fair amount of business.

This article was written by Ajay Anand, Kavitha Cherian, Arpan Gautam, Roopak Majmudar and Arzan Raimawala, members of the Lauder class of 2013.

Two opinion pieces were written in response to this article and published on Knowledge at Wharton: “On Business, Public Morality and the Hindu Epics” and “Real Drivers of Corruption in India and the Rest of the World.”