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Foreign Direct Investment in India

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Presentation on theme: "Foreign Direct Investment in India"— Presentation transcript:

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


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