Dialogue April-June, 2006, Volume 7 No. 4
India’s Economic Diplomacy, its Foreign Investment Policy and the Central Asian Nations.
India’s economic growth and experiences of implementation Investment Policy shows today that India is not only an attractive investment destination and a reliable business partner, but one of the best experienced country in the area of encourage greater foreign investment. The Indian modern practice in providing the basic framework for the realization of Government’s overall industrial and investment policy and its achievements and tendencies is very important for the developing country, including Central Asian nations.
Indian economy has made great strides in the years since independence. The first and second-generation reforms have created a conducive environment for foreign investments in India. Market oriented policies are boosting economic activity, all round development and GDP growth rate. As the Indian economy gears for competition in the international market, overseas investors clearly see the potential for attractive returns from investments in India, which is also evident from the many FDI success stories already achieved. India’s economic growth is constrained, however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real interest rates.
A unique feature of the transition of the Indian economy is that it has become the second fastest growing economy of the world in the year 2003 - 04. If real GDP growth was 6.8% in 1998-99, up from 5% in the 1997-98 fiscal year1, then according to the Central Statistical Organisation2 of the Ministry of Statistics and Programme Implementation, real GDP increased by 8.1% during the first quarter of 2005-2006 against 7.6% in the first quarter of the previous year. In the second quarter of 2005-2006 the GDP growth has averaged 8%3. India has recorded one of the highest growth rates in the 1990s. The target of the 10th Five Year Plan (2002-07) is 8% growth rate.
India’s foreign exchange reserves have also grown significantly since 1991. According to Reserve Bank of India’s Report on Foreign Exchange Reserves4, forex reserves have grown from US$ 5.8 billion at end-March 1991 to US$ 25.2 billion by end-March 1995. The growth continued in the second half of the 1990s, with the reserves touching the level of US$ 38.0 billion by end-March 2000. Subsequently, the reserves rose to US$ 54.1 billion by end-March 2002, US$ 76.1 billion by end-March 2003, to US$ 113.0 billion by end-March 2004 and further to US$ 119.6 billion by end-September 2004. As on December 9, 2005, the foreign exchange reserves have reached a level of US$ 143.098 billion5.
India’s foreign exchange reserves have also grown significantly since 1991. According to Reserve Bank of India’s Report on Foreign Exchange Reserves6, forex reserves have grown from US$ 5.8 billion at end-March 1991 to US$ 25.2 billion by end-March 1995. The growth continued in the second half of the 1990s, with the reserves touching the level of US$ 38.0 billion by end-March 2000. Subsequently, the reserves rose to US$ 54.1 billion by end-March 2002, US$ 76.1 billion by end-March 2003, to US$ 113.0 billion by end-March 2004 and further to US$ 119.6 billion by end-September 2004. As on December 9, 2005, the foreign exchange reserves have reached a level of US$ 143.098 billion7.
In 2004 in India the new United Progressive Alliance’s (UPA) Government came to the power. In the National Common Minimum Programme8 for the UPA Government is written six basic principles for governance, where one of them says “to ensure that the economy grows at least 7-8% per year in a sustained manner over a decade”. For monitoring the progress of the implementation of the National Common Minimum Programme, to provide inputs for the formulation of policy by the Government and to provide support to the Government in its legislative business, the Government has decided to constitute a National Advisory Council9 under the chairpersonship of Shrimati Sonia Gandhi, leader UPA. In the interview to Shekhar Gupta, Editor in Chief of The Indian Express, Congress President Shrimati Sonia Gandhi said, that “The policy of continuing with economic reform will carry on. Nobody should have any doubts on that.”10
Indian Prime Minister Manmohan Singh, discussing his plans to modernize the country’s infrastructure and attract foreign investment, in the interview said11, that “we need an investment of about $150 billion in the next seven to eight years to realize our ambition to provide our country with an infrastructure which is equal to the economic and social challenges that we face”.
Mentioned above confirm that the fundamentals of the Indian economy have become strong and stable. The macro-economic indicators are at present the best in the history of independent India with high growth, healthy foreign exchange reserves, and foreign investment and robust increase in exports and low inflation and interest rates.
II. Investment Policy
2.1. Industrial Policy
The Indian Government’s market liberalisation and economic policy reforms programme aims at rapid and substantial economic growth and integration of the country’s economy with the global economy. The industrial policy reforms have eliminated the industrial licensing requirements except for certain select sectors, removed restrictions on investment and expansion and facilitated easy access to foreign technology and direct investment.
The Industrial Policy Resolution12 of 1956 and the Statement on Industrial Policy13 of 1991 provide the basic framework for the Government’s overall industrial policy. The Industries Development and Regulation Act14 was the principal legislation providing the legal basis for industrial licencing. The industrial policy announced on 24th July, 1991 substantially dispensed with industrial licensing, announced measures facilitating foreign investment and technology transfers, and threw open the areas hitherto reserved for the public sector. The procedures for obtaining government approvals have been progressively simplified and quickened15. Normal Foreign Direct Investment (FDI) proposals are cleared within a month. Areas earlier reserved for public sector have mostly been opened for private sector participation also.
Industrial Licensing. All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for the following: Industries reserved for the Public Sector; Industries retained under compulsory licensing; Items of manufacture reserved for the small scale sector; and Any proposal attracting locational restriction.
Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM)16 with the Secretariat of Industrial Assistance (SIA)17, Department of Industrial Policy and Promotion.
2.2. The basic directions of Foreign Investment Policy
Foreign investment is permitted in virtually every sector, except those of strategic concern such as defence (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior approval from the exchange control authorities (RBI) is required, except for certain specified activities. The investment should be in accordance with the prescribed guidelines and the details of the investment should be filed with the authorities within the prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies and not for purchase of shares from the existing shareholders. This investment procedure is commonly known as the “automatic approval route”18.
2.2.1. Regulation and procedures. Procedures for obtaining government approvals have been considerably simplified19. Approval procedures have been laid out for undertakings that are: exempt from industrial licensing requirements (including existing units undertaking substantial expansion); subject to compulsory industrial licensing; and small scale units exceeding the prescribed limit of investment in plant and machinery and continuing to manufacture small scale reserved item(s) or, in cases where exemption from industrial licensing granted for any item, is withdrawn.
Most FDI activities permitted for foreign direct investment are placed on the automatic route. Under this the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of funds and again within 30 days of issuing shares to the non-resident investor. Some salient features of the FDI policy are: Original investment as also the returns on investment are fully repatriable; Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company; Payment of royalty and use of trade marks and brand name without transfer of technology is also permitted; FDI is not permitted in the areas of agriculture and plantations other than the tea sector, real estate business other than development of integrated townships and settlements, retail trading, atomic energy, lottery business, gambling and betting sectors.
2.2.2. Automatic approval route and FIPB route. Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the Government of India and the Foreign Exchange Management Act (FEMA)20. With increasing liberalisation of the Indian economy, generally, there is no need to obtain prior approval of the Government of India for a fresh investment to be made into an Indian company (only procedural filings have to be made with the Reserve Bank of India (RBI)21, the Indian central bank). In certain cases, however, and also for investment in certain specified sectors, prior approval is required. Further, investment in certain specified sectors, is subject to foreign equity caps.
2.2.3. FDI for New Ventures. All items and activities for FDI up to 100% by Non-Resident Indians (NRI) and Overseas Corporate Bodies (OCB) fall under the Automatic Route except those that expressly require a prior Government approval22. An investor may, if so prefered, choose to make an application to the Foreign Investment Promotion Board (FIPB) of the Government of India and not avail of the automatic route.
Investment in Public Sector Units as also for units located in Export Oriented Units (EOU), Export Processing Zones (EPZ), Special Economic Zones (SEZ), Electronic Hardware Technology Parks (EHTP) and Software Technology Parks (STP) would also qualify for the Automatic Route. Investment under the Automatic Route is governed by the notified sectoral policy and equity caps and RBI ensures compliance of the same. Any change in sectoral policy/sectoral equity cap is notified by the SIA in the Department of Industrial Policy & Promotion.
2.2.4. FDI for Existing Companies. Besides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that: the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors; the money to be remitted should be in the sector(s) under the automatic route.
Otherwise the proposal would need Government approval through the FIPB. For this, the proposal must be supported by a Board Resolution of the existing Indian company. For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are that: they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with Government approval or by accessing the automatic route); the increase in equity level must be from expansion of the equity base; and the foreign equity must be in foreign currency.
Equity participation by international financial institutions in domestic companies is permitted through automatic route subject to Securities Exchange Board of India (SEBI)23 /RBI regulations and sector specific caps on FDI24. Indian companies are required to notify the RBI of receipt of inward remittances within 30 days ofsuch receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.
2.2.5. Government approval (FIPB route). For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary: All proposals requiring an Industrial License; All proposals in which the foreign collaborator has a previous venture/tie-up in India in the same or allied field. However, this condition is not applicable for proposals in the Information Technology industry; All proposals relating to acquisition of shares in an existing Indian company; All proposals falling outside notified sectoral policy/caps or under sectors for which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.
Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.
2.2.6. Foreign Investment in the Small Scale Sector. Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million. Under the small scale industrial policy25, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.
A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.
2.2.7. Foreign Investment Policy for trading activities. Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.
FDI up to 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world.
2.2.8. Other modes of Foreign Direct Investments. Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipts (GDR), American Deposit Receipts (ADR) and Foreign Currency Convertible Bonds (FCCB). These are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the prescribed percentage for automatic approval, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment.
2.3. Implementation Investment Policy in the State Level.
2.3.1. Investment Incentives. The state finances a part of the fixed capital cost of the project. Various states have designated areas as ‘A’, ‘B’ and ‘C’ according to their levels of development26. The level of incentive provided by a state varies and is generally larger for investment in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.
2.3.2. Power Tariff Incentives. Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets. The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which this unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.
2.3.3. For other Incentives. Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. Such incentives include concessional loans granted by State Financial Corporations, price preference on goods made by Small Scale Industries (SSIs) in purchases made by government and semi government organisations, exemption from the payment of octroi (entry tax) for a certain specified period, preferential allotment of land and sheds in industrial areas to SSIs and grant of interest free loans in lieu of deferred sales tax.
A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through various institutional offices on a time bound basis.
III. Institutionalization for realization the Investment Policy
3.1. Department of Industrial Policy & Promotion. The Department of Industrial Policy & Promotion was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development27. Earlier separate Ministries for Small Scale Industries & Agro and Rural Industries (SSI&A&RI) and Heavy Industries and Public Enterprises (HI&PE) were created in October, 1999. With progressive liberalisation of the Indian economy, initiated in July 1991, there has been a consistent shift in the role and functions of this Department: from regulation and administration of the industrial sector into facilitating investment and technology flows and monitoring industrial development in the liberalised environment.
The role and functions of the Department primarily include: Formulation and implementation of industrial policy and strategies for industrial development in conformity with the development needs and national objectives; Monitoring the industrial growth, in general, and performance of industries specifically assigned to it, in particular, including advice on all industrial and technical matters; Formulation of Foreign Direct Investment (FDI) Policy and promotion, approval and facilitation of FDI; Encouragement to foreign technology collaborations at enterprise level and formulating policy parameters for the same and others.
The Department is also responsible for facilitating and increasing the FDI inflow in the country. Foreign Investment Promotion Board (FIPB), now located in Department of Economic Affairs, Ministry of Finance, provides a time bound, transparent and pro-active FDI regime for approval of FDI investment proposals. The Department also plays a pro-active role in resolution of the problems faced by foreign investors in implementation of their projects through Foreign Investment Implementation Authority (FIIA), which interacts directly with the Ministry/State Government concerned.
The Department is responsible for encouraging acquisition of technological capability in various sectors of the industry through liberal foreign technology collaboration regime. Foreign technology induction is facilitated both through FDI and through Foreign Technology Collaboration (FTC) agreement. FTC agreements are approved either through the automatic route under the delegated power exercised by the RBI or by the Government.
This Department is the nodal agency in the Government of India for various instruments of the Asia-Invest Programme of the European Commission. This Department also coordinates with apex Industry Associations such as FICCI, CII, ASSOCHAM in their activities relating to promotion of industrial cooperation and to stimulate foreign direct investment into India besides participating in the Joint Business Councils and other interactive sessions organised by FICCI, CII and ASSOCHAM etc.
3.2. Foreign Investment Promotion Board (FIPB)28
Of the Government of India is constituted mainly to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.
3.3. Secretariat for Industrial Assistance (SIA)29
Has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups.
3.4. Investment Promotion and Infrastructure
Development (IP & ID) Cell30
Has been created in order to give further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry. The functions of the Cell include: Dissemination of information about investment climate in India; Investment facilitation; Developing and distributing multimedia presentation material and other publications; Organising Symposiums, Seminars, etc. on investment promotion; Liaison with State Governments regarding investment promotion; Documentation of single window systems followed by various States; Match-making service for investment promotion; Coordination of progress of infrastructure sectors31 approved for investment/technology transfer, power, telecom, ports, roads, etc.; Facilitating Industrial Model Town Projects, and Industrial Parks, etc.; Promotion of Private Investment including Foreign Investment in the infrastructure sector; Compilation of sectoral policies, strategies and guidelines of infrastructure sectors, both in India and abroad; and Facilitating preparation of a perspective plan on infrastructure requirements for industry.
3.5. Foreign Investment Implementation Authority (FIIA)32
The Government of India has set up the Foreign Investment implementation Authority (FIIA) to facilitate the process of translating FDI approvals into implementation. The agency provides services to foreign investors to help obtain necessary approvals, sort out operational problems and seek intervention of various government agencies to find solution to their problems.
The functions of the FIIA are as under: Expediting various approvals/permissions; Fostering partnership between investors and government agencies concerned; Resolve difference in perceptions; Enhance overall credibility; Review policy framework; and Liaise with the Ministry of External Affairs for keeping India’s diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.
The FIIA acts as a single point interface between the investor and Government agencies including Administrative Ministries/State Governments/Regulatory Authorities/Tax Authorities/Company Law Board, etc.
3.6. Facilitating alliances.
While a number of foreign companies have established operations in the country on their own, others have successfully teamed up with local companies and leveraged their presence in the country. Many organisations help foreign organisations forge alliances with local companies. These include the Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and consulting firms that in addition assist in chalking out entry strategies, undertaking feasibility studies, etc. Indian embassies and missions abroad closely assist foreign investors in their initiatives to participate in various projects in India.
3.7. The State Level Institutes.
India has evolved a comprehensive organisational structure at the state level for industrial development33. In most states the organisations present to assist and promote industries are: Investment Promotion Agencies (IPA)34; State Industrial Development Corporation (SIDC); Small Scale Industries Development Corporation (SSIDC)35; State Financial Corporation (SFC); District Industries Centre (DIC); Single Window Service and Escort Service.
Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.
IV. Entry strategy into India
A business presence in India may be established by a foreign entity through36:
A company may be incorporated, inter alia, using the following modes: Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary; Incorporating a Joint Venture Company (JVC) with an Indian partner and/or with the general public and operating as a listed company; or Incorporating a JVC with an Indian partner and operating as an unlisted company.
4.2. Branch Office.
A branch would mean an establishment carrying on substantially the same activity as its Head Office. Foreign companies intending to open a Branch Office (BO) in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India. As per the guidelines laid down by the RBI, the BO in India is allowed to carry on only the following activities: Export / Import of goods; Rendering professional or consultancy services; Carrying out research work, in which the parent company is engaged; Promoting technical or financial collaboration between Indian companies and parent or overseas group company; Representing the parent company in India and acting as buying / selling agent in India; Rendering services in Information Technology and development of software in India; Rendering technical support to the products supplied by parent / group companies; Foreign airline / shipping company.
4.3. Liaison Office.
A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A LO is not permitted to undertake any commercial /trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The LO is permitted to undertake only the following activities: Representing in India the parent Company / group Company; Promoting export/ import from/ to India; Promoting technical / financial collaborations between the parent / group companies and companies in India; Acting as a communication channel between the parent Company and Indian companies.
Any company intending to open a LO in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.
4.4. Project Office.
Foreign companies can establish Project Offices (POs) in India specifically for the purpose of execution of specific projects. A PO is similar to a branch office opened for the limited purpose of executing a particular contract. As POs are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects set up POs. All expenses of POs must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. RBI approval is required to open a PO.
V. The Achievements
The reform process has had very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991. An analysis of the sources of reserves accretion during the entire reform period from 1991 onwards by Reserve Bank of India37, reveals that the increase in forex reserves has been facilitated by an increase in the annual quantum of foreign direct investment (FDI) from US $ 129 million in 1991-92 to US$ 4.7 billion in 2003-04. During April-September 2004-05, the quantum of FDI inflows into India was of the order of US$ 2.6 billion. Outstanding NRI deposits increased from US$ 13.7 billion at end-March 1991 to US$ 33.3 billion at end-March 2004 but declined to US$ 31.7 billion as at end-September 2004. FII investments into the Indian capital market, which commenced in January 1993, have shown significant increase over the subsequent years. Cumulative net FII investments, increased from US$ 827 million at end-December 1993 to US$ 25.8 billion at end-March 2004 and further to US$ 27.6 billion as at end-September 2004.
Fresh investments continue to rise. The 43rd Centre for Monitoring Indian Economy Pvt. Ltd. (CMIE) Quarterly Survey of Investment Projects38 shows a 39 per cent rise in outstanding investments under various stages of consideration and implementation. The survey captures 9,833 investment projects entailing a total investment of Rs.24,56,186 crore. During the quarter ended October 2005, 564 new projects involving an investment of over Rs.2,11,054 crore were announced. This is the highest new investments announced during a quarter ever since CMIE started undertaking such surveys in 1996.
In the April - August period of 2005-06 total FDI jumped to 2302 $ million about 156% rise over the previous year. Foreign Investment Inflows for the period April - August 2005-06 stood 6,369 million US$ (Direct investment + Portfolio investment)39.
The Asia Pulse News said40 that India attracted more than three times foreign investment at US$7.96 billion during the first half of this fiscal against US$2.38 billion during the corresponding period of 2004-05. For the first six months of this fiscal, the country drew US$2.86 billion of foreign direct investment and US$5.10 billion of portfolio investment through GDRs, ADRs, FIIs, offhsore funds and others, the Reserve Bank said in its latest bulletin.
The Economic Times of India41 featured the news: India has emerged stronger on the global investment radar in 2005, overtaking the United States to become the second-most attractive FDI destination in the world. An annual survey of executives from the world’s largest companies ranked India second only to China in the FDI attractiveness ranking, scoring 1.951 on a scale of 0-3.
FII investments in India touched a record US$9.05bn (on a net basis) on December 12, 2005. This is higher than the ’04 figure of US$8.4bn. Foreign funds have been pouring in huge sums of money into the Indian market over the past three years. They have pumped in over US$23bn over the past three years as India is emerging as a major investment destination for both US and Asian investors42.
FIIs bought shares worth US$ 862.94 million in the first quarter (April-June 05) and US$ 3.73 bn worth shares in the second quarter (July-September 2005). A BS Research Bureau study, based on BSE-500 index companies, shows that FIIs bought 803 million shares in April-September 200543.
Between January 5 and February 14, 2005, FIIs invested more in Indian equities than in Korean or Taiwanese equities44. While the Korean market received over US$1 billion, Taiwan had US$947 million, India’s share amounted to US$1.1 billion.
Bill Gates, Chairman of Microsoft Corp, the world’s largest software company, said that the company will invest US$ 1.7 billion in India over the next four years to expand its operations45.
The IT sector saw phenomenal growth in FDI in 2005 with $6.5 billion of investment46. The total investment in IT bypassed the India’s ITeS exports in 2004 ($5.7 billion) and was 48.3% of total IT exports.
VI. Potential for investment in India
The Indian Government is focusing on expansion and modernization of roads and has opened this up for private sector participation47. 48 new road projects worth US$ 12 billion are under construction. Development and upgradation of roads will require an investment of US$ 24 billion till 2008. Private sector participation in road projects will grow significantly.
The Government of India has announced ambitious plan to add around 1,00,000 MW of additional generation capacity by the year 201248. To attract private investment of such magnitude, Government of India had taken various steps to provide for an adequate administrative and legal framework. The Ministry of Power has formulated a blueprint to provide reliable, affordable and quality power to all users by 2012. This calls for investment of US$ 73 billion in the next five years. Opportunities are there for investment in power generation and distribution and development of non-conventional energy sources. Special incentives and tax-breaks are given for certain sectors such as power, electronics, telecom, software, hydrocarbons and exports.
The railway sector will need an investment of US$ 22 billion for new coaches, tracks, and communications and safety equipment over the next ten years49. A 10 year Corporate Safety Plan of the Indian Railways envisaging an expenditure of US $ 7.24 bn. besides development of appropriate technology for higher level of safety in train operation. Metro Rail Corporation projects worth US $ 12.84 bn in cities like Delhi, Bangalore, Hyderabad, Chennai, Ahmedabad and many other cities are on target50.
Upgradation and modernization of airports will require US$ 33 billion investment in the next ten years. Airports Authority of India has set a target of investing 1 billion dollars for modernization of airports51.
There is potential for investment in the expansion and modernization of ports, inland navigation and maritime transport52. The Government has taken up the US$ 22 billion ‘Sagarmala’ project to develop the Port and Shipping sector under Public-Private Partnership. 100 percent FDI is permitted for construction and maintenance of ports. The Government is offering incentives to investors. While the government will take care of 15% of the investment, the rest will come from the private sector. The investment requirements in the maritime sector are estimated at US$22 billion.
There is potential for investment in urban infrastructure projects. Water supply and sanitation projects alone offer scope for annual investment of US$ 5.71 billion53.
The entire gamut of exploration, production, refining, distribution and retail marketing in the oil & gas sector presents opportunities for FDI.
India has an estimated 85 billion tons of mineral reserves remaining to be exploited. Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, cobalt, silver, tin etc. There is also scope for setting up manufacturing units for value added products54.
The telecom market, which is one of the world’s largest and fastest growing, has an investment potential of US$ 20-25 billion over the next five years55. The telecom market turnover is expected to increase from US$ 10 billion in 2004 to US$ 13 billion by 2007. The IT industry and IT-enabled services, which are rapidly growing offer opportunities for FDI.
India has emerged as an important venue for the services sector including financial accounting, call centers, and business process outsourcing. There is considerable potential for growth in these areas.
The Indian Auto component industry56, currently estimated at US $63 billion, is expected to “triple” in less than eight years time to US $17 billion by 2012.The Indian auto industry with a turnover of US $ 12 billion and the auto parts industry with a turnover of US$ 3 billion offer scope for FDI.
The Government is encouraging the establishment of world-class integrated textile complexes and processing units.
In India the Food Processing Industry is relatively nascent and offers opportunities for FDI57. It accounts for US$ 29.4 billion, in a total estimated market of US$ 91.66 billion. There is a rapidly increasing demand for processed food caused by rising urbanization and income levels. To meet this demand, the investment required is about US$28 billion. Food processing has been declared a priority sector. The outlay in the Food Processing Sector has been increased from US$19.5 million in 2004-05 to US$41.35 million the next year, more than twice the earlier amount. The government is also considering investing US$22.97 million in at least 10 mega food parks in the country besides working towards offering 100 per cent foreign direct investment and income tax benefits in the sector. According to a study by the Hyderabad-based, Administrative Staff College of India (ASCI), the Indian food processing industry requires investments to the tune of $40 billion for upgrading technology and capital expenditure to compete in global markets58.
The Healthcare industry is expected to increase in size from its current US$ 17.2 billion to US$ 40 billion by 201259. Healthcare spending in the country will double over the next 10 years. Private healthcare will form a large chunk of this spending, rising from US$14.8 billion to US$33.6 billion in 2012. This figure could rise by an additional US$8.4 billion if health insurance cover is available to the rich and the middle class. With the expected increase in the pharmaceutical market, the total healthcare market could rise from US$22.2 billion currently (5.2 percent of GDP) to US$50 billion-US$69 billion (6.2-8.5 percent of GDP) by 2012.
The travel and tourism industry, which has grown to a size of US$ 32 billion, offers scope for investment in hotels, resorts and tourism infrastructure60.
The Government has recently established Special Economic Zones61 with the purpose of promoting exports and attracting FDI. These SEZs do not impose duty on imports of inputs and they enjoy simplified fiscal and foreign exchange procedures and allow 100% FDI.
VII. Conclusion: India offers competitive advantages
Today, the Indian economy is considerably open and as it opens up further, it is expected to derive greater efficiency and develop stronger fundamentals so as to be resilient to global adverse economic conditions that may arise from time to time. The first and second-generation reforms initiated in India have created an environment conducive for foreign investments. Market oriented policies have been developed to boost growth. Investment approval procedures have been simplified. Government machinery is in place to entertain Investors’ concerns and trouble-shooting. These improvements have paved the way for fresh investments.
In mi opinion the country offers good investment opportunities in diversified areas and has something to offer for every investor: the biggest democracy in the world with a large and growing market. It is also emerging as an important sourcing base for products and services. India has the skills, systems and processes required to service global markets.
Today India also offers next competitive advantages: Foreign investment is welcome in almost all sectors barring those of strategic concern like atomic energy, railways and sensitive defence production; Thrust on technology, innovation and knowledge based industries and services; Well developed infrastructure and technical and marketing services; Promising future in the burgeoning information technology and biotechnology industries; Developed banking system and commercial banking network, supported by a number of international banks, insurance joint ventures and national and state level financial institutions; Acceleration of the privatisation process and restructuring of public enterprises; Special investment and tax incentives given for exports and certain sectors such as power, electronics, telecom, software, oil & gas and research and development activities; Establishment of Special Economic Zones which provide virtual offshore operation facilities and advantages of a free trade area.
The President of India Dr. Avul Pakir Jainulabdeen Abdul Kalam in his Address62 to the Parliament said, that “Investment, both domestic and foreign, has been rising and is a measure of the confidence of investors in our economy. In order to accelerate investment activity further by removing policy and operational constraints, the Government has constituted an Investment Commission. While foreign exchange reserves continue to remain at record levels, the revival of investment activity and the consequent increase in import demand has stabilized the rate of accumulation. Overall, all macro-economic indicators are robust and positive and there is an air of optimism in the economy and the markets”.
About the India’s economic potential and bilateral cooperation between India and Uzbekistan, the author has also said on Academic and professors seminar63, which was held in Indian Institute of Finance of 27th August 2004.
I believe that in the next ten years, India is expected to evolve as a major manufacturing economy on the one hand and pride itself of a vibrant services sector on the other. The economy will witness an increased pace of privatisation of public enterprises as the central and state governments are likely to allocate higher financial resources towards social infrastructure. The country is looking at an exponential improvement in terms of both economic and social parameters.
Today I can say with confidence that the unique feature of Indian economy has been high growth with stability and has proved its strength and resilience.
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