1. Foreign Direct Investment in India
Dr. Ajay Dua
Secretary
Department of Industrial Policy & Promotion
Ministry of Commerce & Industry
Government of India
28th November 2005
Website:

2. Indian Economy – An Overview
Economic Performance
Sustained economic growth
Average last 10 years 6.5% %
Forecast up to >7.0%
Forecast till 2050 – Goldman Sachs 5 % p.a.
Services share in GDP over 50% (52.4% share in GDP in )
Manufacturing sector grew at 8.8% in (17.4% share in GDP in )
Foreign Trade
Merchandise exports grew by 25% in , now US$80 billion
Imports grew by 36%, now US$106 billion
Investment
Foreign Investment – over US$14 billion in (FDI US$5.5 billion, FII US$8.9 billion)
Mature Capital Markets
NSE third largest, BSE fifth largest in terms of number of trades
A well developed banking system
Slow and steady consistent growth
IFS statistics of IMF for 2003 show;
India’s share in world exports is around 0.8% as against 5.9% of China 1.3 % of Malaysia, 2% of Singapore
Inflation based on WPI, 7.5% for week ending July 24

3. Economic Reforms- Fiscal
Rationalization of tax structure – both direct and indirect
Progressive reduction in peak rates
Peak Customs duty reduced to 15%
Corporate Tax reduced to 30%
Customs duties to be aligned with ASEAN levels
Value Added Tax introduced from 1st April 2005-
only 6 states left
Fiscal Responsibility & Budget Management Act, 2003
Revenue deficit to be brought to zero by 2008
India among the top reformers in 2003: World Bank’s ‘Doing Business in 2005’
Reforms have been continuous indicating the commitment of successive Governments

4. Economic Reforms: Liberalisation of Investment & Trade Policies
Industrial Licensing
Progressive movement towards delicensing and deregulation
Licensing limited to only 5 sectors (security, public health & safety considerations)
Foreign Investment
Progressive opening of economy to FDI
Portfolio investment regime liberalised
Liberal policy on technology collaboration
Trade Policy
Most items on Open General License, Quantitative Restrictions lifted
Foreign Trade Policy seeks to double India’s share in global merchandise trade in 5 years

5. Economic Reforms: Exchange Control & Taxation
All investments are on repatriation basis
Original investment, profits and dividend can be freely repatriated
Foreign investor can acquire immovable property incidental to or required for their activity
Rupee made fully convertible on current account
Taxation
Companies incorporated in India treated as Indian companies for taxation
Convention on Avoidance of Double Taxation with 65 countries

6. Manufacturing Competitiveness- ‘Made in India’
Second most attractive destination for manufacturing
ATKearney’s FDI Confidence Index 2004
Indian industry globally competitive in a wide range of manufacturing skill-intensive products:
Apparels, electrical and electronics components; speciality chemicals; pharmaceuticals; etc.
Automotive components: Major MNC’s & their OEMs sourcing high-quality components from India
Volvo, GM, GE, Chrysler, Ford, Toyota, Unilever, Cliariant, Cummins, Delphi
Indian companies now having manufacturing presence in many countries
Over 55% of approved outward investment by India companies in manufacturing activities
Today India is favorite destination. In fact over the years many major world players have been in Indian market
Ford India is Ford’s lowest cost plant world wide, utilises India as a global source for select auto components
Indian expertise is very wide based. India produces largest numbers of Engineers in the world

7. Evolution of FDI Policy
More sectors opened ; Equity caps raised in many other sectors Procedures simplified
Up to 100% under Automatic Route in all sectors except
a small negative list
2000
Up to 74/51/50% in 112 sectors under the
Automatic Route 100% in some sectors
1997
FDI up to 51% allowed under the Automatic route in 35 Priority sectors
1991
FDI up to 35% allowed under the automatic route in 35 priority areas in 1991
The list of priority sectors expanded to 112 activities in 1997
Pre 1991
Allowed selectively up to 40%
FDI Policy Liberalization

8. Investing in India – Entry Routes
Automatic Route
Prior Permission
(FIPB)
General Rule
No prior permission
required
Inform Reserve Bank
within 30 days of
inflow/issue of shares
By Exception
Prior Government
Approval needed.
Decision generally
within 4-6 weeks
Entry routes are easy

9. FDI Policy Initiatives : 2000-2004
New sectors opened to FDI
Defence production, Insurance, print media - up to 26%
Development of integrated townships up to 100%
e-commerce, ISP with out gateway, voice mail, electronic mail, tea plantation -100% subject to 26% divestment in 5 years
FDI equity limits raised
Private sector banks raised from 49% to 74%
Drugs and pharmaceuticals from 74% to 100%
Advertising from 74% to 100%
Private sector refineries, Petroleum product marketing, exploration , petroleum product pipelines – 74% to 100%
Procedural simplification
Issue of shares against royalty payable allowed
New Sectors opened during
FDI equity limits raised in the following sectors
Procedures simplified

10. Recent Initiatives : June 2004 onward
FDI in domestic airlines increased from 40% to 49%. Automatic route allowed
FDI up to 100% allowed under the automatic route in development of townships, housing, built up infrastructure and construction development projects
Foreign investment limit in Telecom services increased to 74%
FDI and portfolio investment up to 20% allowed in FM Broadcasting. Hitherto only Portfolio investment was allowed.
Transfer of shares allowed on automatic route in most cases
Fresh guidelines for investment with previous joint ventures
A WTO (TRIPs) IPR regime compliant in position since 2005 – Patents Act amended to provide for product patent in pharma and agro-chemicals also.
Fresh guidelines on setting up joint ventures with previous joint ventures, technology transfer / trademark agreement in India have been notified vide Press Note 1 (2005 series)
FDI up to 100% allowed on the automatic route for integrated townships, housing, construction development projects and built-up infrastructure subject to minimum capitalisation and area development Press Note 2 (2005 Series)
Investment made by NRI in convertible currency made repatriable
Foreign investment including FDI, FII , ADR, GDR, proportionate equity in investing companies up to 74% allowed Press Note 5 (2005 Series)
FDI and FII investment of up to 20% allowed in FM Broadcasting. So far only 20% portfolio investment was allowed. Press Note 6 (2005 Series)

11. Extant Policy on FDI
FDI up to 100% allowed under the ‘Automatic Route’ in all activities except for
Sectors attracting compulsory licensing
Transfer of shares to non-residents (foreign investors)
In Financial Services, or
Where the SEBI Takeovers Regulation is attracted
Investor having existing venture in same field
Sector specific equity/route limit prescribed under sectoral policy
Investments made by foreign investors are given treatment similar to domestic investors

12. Main Sectors with FDI Equity/Route Limit
FDI equity limit-Automatic route
Insurance – 26%
Domestic airlines – 49%
Telecom services- Foreign equity 74%
Private sector banks- 74%
Mining of diamonds and precious stones- 74%
Exploration and mining of coal and lignite for captive consumption- 74%
FDI requiring prior approval
Defence production – 26%
FM Broadcasting - foreign equity 20%
News and current affairs- 26%
Broadcasting- cable, DTH, up-linking – foreign equity 49%
Trading- wholesale cash and carry, export trading, etc., 100%
Tea plantation – 100%
Development of airports- 100%
Courier services- 100%

13. Foreign Technology Collaboration Policy
Foreign technology agreements also allowed under Automatic route:
Lump-sum fees not exceeding US$2 Million
5% on domestic sales and 8% on exports, net of taxes
Royalty up to 2% on exports and 1% also permitted for use of Trade Marks and Brand name, without any technology transfer
Wholly owned subsidiaries can also pay royalty to their parent company
Payment of royalty without any restriction on the duration allowed.

14. India: FDI Outlook
2nd most attractive investment destination among the Transnational Corporations (TNCs) - UNCTAD’s World Investment Report, 2005
3rd most attractive investment destination – AT Kearney Business Confidence Index, 2004
Up from 6th most attractive destination in 2003 and 15th in 2002
2nd Most attractive destination for manufacturing
Among the top 3 investment ‘hot spots’ for the next 4 years
UNCTAD & Corporate Location – April 2004
Most preferred destination for services - AT Kearney’s 2005 Global Services Location Index (previously Offshore Location Attractiveness Index)
Rated as the fourth preferred destination for US and British investors
Rated as the sixth preferred destination for manufacturing

15. India & Other Countries - Policy Framework
MLY-21
MLY-19
Top 1/3
THA-32
THA-14
IND-35
IND-34
IND-37
THA-39
IND-41
CHN-38
CHN-50
MLY-58
Mid 1/3
Foreign Ownership restrictions:(10.26) - Whether foreign ownership of companies is limited to few cases
Efficiency of legal framework (6.02) – legal framework for the private business to settle disputes and challenge the legality of Government action and/or regulation.
Government’s interference in corporate investment (2.10) – Distorting effect of Government interference on corporate investment
Financial market sophistication (2.05)- Sophistication of financial markets compared to international norms
Al ranking out of 102 countries.
Lower ranks signifies better rating
MLY-67
THA-75
CHN-72
Bot. 1/3
CHN-81
Restriction on Foreign ownership
Efficiency of Legal Framework
Govt. inter. In Corporate Invest.
Financial market Sophistication
Source: Global Competitiveness Report )

16. India’s Competitive Strengths - Human Capital
India’s competitive edge - its highly-skilled manpower and entrepreneurial expertise
Over 380 universities (11,200 colleges)
1500 research institutions
Over 200,000 engineering graduates
Over 300,000 post graduates from non-engineering colleges
2,100,000 other graduates
Around 9,000 PhDs
Knowledge workers in software industry increased from 56,000 in to over 1 million by ;
54% of India’s population under 25 years of age
India would continue to be surplus in working population for a long-time
Would contribute 25% to the additional working population globally over the next 5 years.

17. India’s Competitive Strengths – HRD Contd.
Rank out of 102 countries
Availability of scientist and engineers
Quality of management schools 8
Quality of scientific research institutions 20
Quality of educational system 36
(Source: World Economic Forum’s ‘Global Competitiveness Report, ’)

18. ICT Advantages IT –ITES Industry
Exports US$17.2 billion in , growth of 34% over previous year
2008 exports target : US$60 billion, to be 35% of India’s total exports
High quality standards
76 SEI/CMM level 5 companies, two third of world’s total, are Indian
Over 250 of the Fortune 500 companies are clients of Indian firms
R&D base of over 100 FORTUNE 500 companies
Investment Opportunities
Collaborative ICT research
Joint Software development in a variety of applications
Source: NASSCOM

19. Global Business Leaders on India
JACK WELCH, GE
JOHN CHAMBERS, CISCO
“India is a developed country as far as intellectual capital is concerned”
“We are expanding our presence in India to take advantage of the ample R&D talent available”
“India is handling the most sophisticated projects in the world. I am impressed with the quality of work”
MICHAEL DELL, DELL
BILL GATES, MICROSOFT
“India can be a major part of Dell’s operations and we are looking to capitalize on India’s human capital”

20. Physical Infrastructure
MLY-7
MLY-9
MLY-12
Top 1/3
THA-20
MLY-26
THA-29
THA-36
THA-41
IND-47
Mid 1/3
CHN-55
CHN-54
CHN-60
Overall quality (5.01) – General infrastructure poorly developed and inefficient or well developed or among the best in the world.
Ports infrastructure quality (5.03) – Port facilities and inland waterways are underdeveloped or as developed as the best in the world.
Quality of electricity supply (5.05) - Quality of electricity supply in terms of lack of interruption and lack of voltage fluctuations is worse than most countries or equals to the highest in the world.
Air transport infrastructure quality 5.04) – Air transport is inefficient and inadequate or as extensive and efficient as the world’s best.
CHN-68
IND-69
IND-70
Bot. 1/3
IND-85
Overall
Ports
Electricity
Air Transport
Source: Global Competitiveness Report )

21. Recent Infrastructure Initiatives
National Highway Development Programme to develop over 24,000 km of highways
Golden Quadrilateral
NSEW Corridor
Links to ports and State capitals
Modernisation of airports
Metro and other airports
Development of ports with private sector
The Electricity Act, 2003 provides the framework for development of power sector
‘Bharat Nirman’ Programme to develop rural infrastructure at an estimated cost of Rs. 1,74,000 crore (~US$40 billion)
Jawhar Lal Nehru Urban Renewal Mission –Rs. 100,000 crore (US$22 billion)
Country wide rural connectivity programme to link all unconnected village having population of 500 with fair weather road undertaken

22. Telecommunications Among the fastest growing telecom markets
550,000 km of optical fibre cable laid
2 million Cellular phones added every month
Among the lowest mobile tariff in the world
Share of private sector 50%
Tele-density of 10.66, expected to be 20 in next three years
New Broad Band Policy announced:
690,000 connections since April 2005
Internet subscribers 6 million (March 05)
Investment Opportunities
Setting up manufacturing facilities;
Supply of hand sets and equipments
Telecom & Value added service.
Cell phones increasing at an astonishing rate of 20 million a year.
Already increase of 10 million has taken place this year.
Most experts expect increase of 100 million in the next 3-4 years.
Provides immense opportunities for setting up manufacturing facilities.
Landline phones also increasing rapidly. Teledensity has already reached 7 per 1000.
Tele-density could reach by May be much earlier.

23. Roads Policy Recent Initiatives Investment Opportunities
FDI up to 100% is permitted for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels
Ten year tax holiday for road and highway projects
Recent Initiatives
Existing road network of 3.3 million kilometers
24,000 km of Highways being developed under National Highway Development Programme
Golden Quadrilateral : 5846 kms kms completed
NSEW Corridor: 7300 kms – 784 kms completed, 3691 kms under implementation
Investment US$20 billion envisaged
Investment Opportunities
Projects for 12,000 km would be on offer
Many more opportunities in the States

24. Power Policy & Incentive Institutional Reforms
FDI up to 100% is permitted on the automatic route in all segments except atomic power
Ten-year tax holiday for generation and distribution or transmission and distribution of power
Institutional Reforms
The Electricity Act 2003 allows trading in power and provides for further deregulation;
Independent Regulator in most states
Investment Opportunities
Additional capacity required 100,000 MW till 2012
Investment US$120 billion needed
Financial closure of over 6000 MW capacity achieved in last one year
Addition of 100,000 MW planned over the next 10 years.
The existing installed capacity to be doubled.
Another initiative to develop 50,000 MW of hydro electricity. Detailed project reports are being prepared to facilitate private investment.
New Electricity Act has further liberlaised the electricity sector.
Incentives: A ten-year tax holiday is available for companies and industries that generate and distribute power if they begin operations before March 31, In addition, a company undertaking substantial renovation and modernisation of existing transmission and distribution lines is entitled for deduction of 100% of the profits if the renovation is undertaken before March 31, 2006.

25. Ports Policy & Incentives Public-private partnership
FDI up to 100% permitted for construction and maintenance of ports and harbours.
Ten year tax holiday
Public-private partnership
12 major ports, 185 minor ports
14 private/ captive projects with investment of US$ 600 million completed
24 projects with investment of US$1.6 billion under implementation/award
Investment requirement of US$22 billion to develop maritime sector
Ports & Shipping
Inland waterways
The Sagar Mala project envisages development of ports and shipping sector at an investment of over US$22 billion, largely in the private sector.
25 projects to upgrade the inland waterways identified. Techno-economic feasibility completed.
Total investment in maritime sector expected at US$ 3 billion in the next 20 years.
Ports with private participation:
P&O Australia at JNPT & Chennai
United Liner Agencies at Vizag
PSA at Tutticorian
Agreement between JNPT and Gateway Terminals (Maseak and CONCOR) for contained terminal at
International Container Transshipment at Kochi with Dubai Ports

26. Industrial Clusters A large number of industrial clusters
400 SMEs and 2000 artisan clusters
Account for 60% of manufactured exports and substantial share of employment
Gems and Jewellery; Chemicals, Energy, Pharma, Metallurgy, Consumer Industry, Food Processing, Knitwear; Leather and leather products Auto, Engg., Software, Mining, Machineries, etc.
Government initiative to develop infrastructure in existing industrial clusters

27. Special Economic Zones
New Law on SEZ enacted
Policy
Duty free zones, deemed foreign territories
FDI up to 100% permitted in almost all manufacturing activities
Transfer of goods from DTA to SEZ treated as exports,
Units to be net foreign exchange earner within 5 years. No export commitments
No limits on DTA sales
Can be set up in the public, private or joint sector
Single Window Clearance
Incentives
For developer: Income tax exemption for a block of 10 years in 15 years
For units: 100% Income Tax exemption for first 5 years, 50% for next 5 years and 50% of the ploughed back export profits for next 5 years
Exemption from indirect taxes; excise, sales, services tax, etc.
Freedom to raise ECB with out any maturity restrictions

28. Special Economic Zones-contd.
11 Special Economic Zones are functional
SEEPZ Mumbai, Kandla, Cochin, Chennai, Visakhapatnam, Falta, NOIDA, Surat, Salt Lake, Indore and Jaipur
Over 800 functional units employing over 100,000 persons
Exports of US$4 billion in
42 new Special Economic Zones have been approved and are under establishment
Many have participation with State Governments and Private Sector
Major Industries in Special Economic Zones
Gems & Jewellery, Electronics & Hardware, Software, Textile & Garment, Engineering Goods, Sports Goods, Leather Products, Chemicals & Allied Products

29. Public Private Partnership
Infrastructure projects might not be financially viable on their own;
Public Private Partnership to bring in private sector resources and techno-managerial capabilities;
‘Viability Gap Funding’ for
Roads, railways, seaports, airports;
Power
Water supply, sewerage, solid waste disposal in urban areas;
International convention centres.
Funding in the form of capital grant, Operation & Management support, interest subsidy, etc.
Support linked with predefined milestones.

30. Food Processing Third largest producer of food items
Largest milk producer
Largest livestock population;
2nd largest in fruits & vegetables
Opportunities in food processing sector
50% of household income spent on food items
With increasing income levels and urbanisation fast growth in demand of processed food expected; over 250 million strong middle class
Low levels of value addition in food sector: only 7%
New Integrated Food Law being enacted
Investment of US$ 28 billion required to raise food processing from 2% to 8-10%.
Investment opportunities in
Processing of fruit & vegetable, meat, fish & poultry, milk products, packaged food & drinks.
Establishing infrastructure, cold chain, etc.
Producer of a large number of food products
The demand for processed food rising with growing urbanization and changing life styles

31. Incentives for the Development of Industrially Backward Areas
A special package of incentives to promote industrilisation of industrially backward regions
North Eastern states, Sikkim, Jammu & Kashmir, Uttaranchal and Himachal Pradesh
Incentives
100% Income Tax Exemptions for 10 years
Excise Duty Exemptions for 10 years
Transport Subsidy for transportation of raw material and finished products,
Investment Subsidy (50-90%)

32. India & Other Countries - Quality of Business Environment
THA-10
MLY-36
IND-17
MLY-36
MLY-14
Top 1/3
MLY-24
THA-27
THA-27
THA-30
CHN-30
IND-31
IND-37
IND-37
CHN-46
CHN-46
CHN-58
Mid 1/3
State of cluster development (9.06) – Are cluster limited and shallow or common and deep.
Value chain presence (10.02) – Exporting companies are primarily involved in resource extraction or production, or also perform product design, marketing sales, logistics and other functions.
Firm level technology absorption (3.02) – Companies are not interested or interested in absorbing technology.
Local supplier Quality (9.03) – Quality of local suppliers is poor as they are inefficient and have little technological capabilities, or very good as they are internationally competitive and assist in new product and process development.
Bot. 1/3
State of Cluster Development
Value Chain Presence
Firm Level technology Absorption
Local Supplier Quality
Source: Global Competitiveness Report )

33. Governance and Regulatory System
Central, State and Local levels of Government with their specified powers and responsibilities seen as complicated in regulatory administration by investors
11.9% of Senior Management’s time spent in dealing with Government agencies
(Source: World Bank’s Report - India Investment Climate Assessment, 2004)
World Bank’s Report ‘Doing Business in 2006’
71 days required to set up a Company and start business – Incorporation of Company and PAN/TAN allotment taking most time
Paying taxes: 59 transactions taking 264 hours in a year
Closing a business: time taken 10 years

34. Governance - Initiatives
Major e-governance initiatives undertaken at Central and State level
National e-Governance Action Plan
Projects being taken up in Mission mode at Central and State level.
Integrated services projects for services across Departments.
MCA-21 - Ministry of Company Affairs, to cover all Registrar of Companies by June 2006
e-Biz project being taken up by the Department of IPP
To set up a web enabled portal to provide for the services at the Central, State and Local level during the entire life cycle of business
To begin with a pilot project covering 25 services in four states
Project capable of rapid upscaling to cover other services and extend to other areas
Right to Information Act for greater transparency in public administration

35. Investment Opportunities
Development and management of infrastructure
Food processing, including logistic and support services, development of cold chain
Manufacturing – relocation into India
R&D – leveraging on abundant skilled manpower
IT & ITES, Software as well as hardware

36. India – A Good Place to Put Your Money
Largest democracy – political stability & consensus on reforms
Fourth largest Economy (PPP) - A safe place
to do business
Liberal & transparent investment policies
Largest reservoir of skilled manpower
Long-term sustainable
Competitive advantage
- High growth rate economy
Second Largest Emerging Market
High returns on investment; According to study by US Department of Commerce

37. Thank You