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: www.dipp.gov.in
1
Indian Economy – An Overview

Economic Performance

Sustained economic growth
-




Merchandise exports grew by 25% in 2004-05, now
US$80 billion
Imports grew by 36%, now US$106 billion
Foreign Investment – over US$14 billion in 2004-05 (FDI
US$5.5 billion, FII US$8.9 billion)
Mature Capital Markets


Services share in GDP over 50% (52.4% share in GDP in
2004-05)
Manufacturing sector grew at 8.8% in 2004-05 (17.4%
share in GDP in 2004-05)
Investment


6.5%
6.9%
>7.0%
5 % p.a.
Foreign Trade


Average last 10 years
2004-05
Forecast up to 2006-07
Forecast till 2050 – Goldman Sachs
NSE third largest, BSE fifth largest in terms of number of
trades
A well developed banking system
2
Economic Reforms- Fiscal


Rationalization of tax structure – both
direct and indirect
Progressive reduction in peak rates




Value Added Tax introduced from 1st April
2005

Peak Customs duty reduced to 15%
Corporate Tax reduced to 30%
Customs duties to be aligned with ASEAN
levels
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’
3
Economic Reforms: Liberalisation of Investment &
Trade Policies

Industrial Licensing

Progressive movement towards delicensing
and deregulation
-


Foreign Investment

Progressive opening of economy to FDI

Portfolio investment regime liberalised

Liberal policy on technology collaboration
Trade Policy


Licensing limited to only 5 sectors (security,
public health & safety considerations)
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
4
Economic Reforms: Exchange Control & Taxation
Exchange Control

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
5
Manufacturing Competitiveness- ‘Made in India’

Second most attractive destination for
manufacturing


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


ATKearney’s FDI Confidence Index 2004
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
6
Evolution of FDI Policy
2000-05
More sectors opened ; Equity caps raised in many other sectors Procedures
simplified
2000
Up to 100% under Automatic Route in all sectors except
a small negative list
1997
Up to 74/51/50% in 112 sectors under the
Automatic Route 100% in some sectors
1991
FDI up to 51% allowed under the
Automatic route in 35 Priority sectors
Pre 1991
Allowed selectively up to
40%
FDI Policy Liberalization
7
Investing in India – Entry Routes
Investing in India
Automatic Route
General Rule
No prior permission
required
Inform Reserve Bank
within 30 days of
inflow/issue of shares
Prior Permission
(FIPB)
By Exception
Prior Government
Approval needed.
Decision generally
within 4-6 weeks
8
FDI Policy Initiatives : 2000-2004

New sectors opened to FDI




FDI equity limits raised





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
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
9
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.
10
Extant Policy on FDI

FDI up to 100% allowed under the
Route’ in all activities except for

Sectors attracting compulsory licensing

Transfer of
investors)
-

shares
to
‘Automatic
non-residents
(foreign
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
11
Main Sectors with FDI Equity/Route Limit
FDI equity limitAutomatic route
FDI requiring prior
approval

Insurance – 26%

Defence production – 26%

Domestic airlines – 49%


Telecom services- Foreign
equity 74%
FM Broadcasting - foreign
equity 20%

News and current affairs- 26%

Private sector banks- 74%


Mining of diamonds and
precious stones- 74%
Broadcasting- cable, DTH, uplinking – foreign equity 49%

Exploration and mining of coal
and lignite for captive
consumption- 74%
Trading- wholesale cash and
carry, export trading, etc.,
100%

Tea plantation – 100%

Development of airports- 100%

Courier services- 100%

12
Foreign Technology Collaboration Policy



Foreign technology agreements also allowed
under Automatic route:

Lump-sum fees not exceeding US$2 Million

Royalty @ 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.
13
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



Among the top 3 investment ‘hot spots’ for the
next 4 years


Up from 6th most attractive destination in 2003 and 15th in
2002
2nd Most attractive destination for manufacturing
UNCTAD & Corporate Location – April 2004
Most preferred destination for services - AT
Kearney’s 2005 Global Services Location Index
(previously Offshore Location Attractiveness
Index)
14
India & Other Countries - Policy Framework
MLY-21
MLY-19
Top 1/3
THA-32
IND-35
IND-41
CHN-50
THA-14
IND-34
CHN-38
IND-37
THA-39
MLY-58
Mid 1/3
MLY-67
Bot. 1/3
THA-75
CHN-72
CHN-81
Restriction on
Foreign ownership
Efficiency of Legal
Govt. inter. In
Financial market
Framework
Corporate Invest.
Sophistication15
Source: Global Competitiveness Report 2003-04)
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 nonengineering colleges
 2,100,000 other graduates
 Around 9,000 PhDs







Knowledge workers in software industry
increased from 56,000 in 1990-91 to over 1
million by 2004-05;
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.
16
India’s Competitive Strengths – HRD Contd.
Rank out of 102 countries

Availability of scientist and engineers
3

Quality of management schools
8

Quality of scientific research institutions
20

Quality of educational system
36
(Source: World Economic Forum’s ‘Global Competitiveness Report,
2003-04’)
17
ICT Advantages
 IT –ITES Industry
 Exports US$17.2 billion in 2004-05,
growth of 34% over previous year
 2008 exports target : US$60 billion, to
be 35% of India’s total exports
IT- ITES Exports
In US $ Billion
20
17.2
18
 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
16
14
12.8
12
10
10
8
8
6.2
6
4
2
0
2000-01
2001-02
2002-03
2003-04
2004-05
 Investment Opportunities
• Collaborative ICT research
• Joint Software development in a variety
of applications
Source: NASSCOM
18
Global Business Leaders on India
“India is a developed
country as far as
intellectual capital is
concerned”
JACK WELCH, GE
“India can be a major
part of Dell’s operations
and we are looking to
capitalize on India’s
human capital”
MICHAEL DELL, DELL
“We are expanding
our presence in India
to take advantage of
the ample R&D talent
available”
JOHN CHAMBERS, CISCO
“India is handling the
most sophisticated
projects in the world. I
am impressed with the
quality of work”
BILL GATES, MICROSOFT
19
Physical Infrastructure
MLY-7
Top 1/3
MLY-12
MLY-26
THA-29
THA-36
Mid 1/3
MLY-9
CHN-55
IND-70
THA-41
THA-20
IND-47
CHN-54
CHN-60
CHN-68
IND-69
Bot. 1/3
IND-85
Overall
Ports
Electricity
Source: Global Competitiveness Report 2003-04)
Air Transport
20
Recent Infrastructure Initiatives

National Highway Development Programme to develop
over 24,000 km of highways




Modernisation of airports






Golden Quadrilateral
NSEW Corridor
Links to ports and State capitals
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
21
Telecommunications

80
Among the fastest growing telecom markets


70
2 million Cellular phones added every month

No. in million
60
19.25
50
40
19.5
Share of private sector 50%

Tele-density of 10.66, expected to be 20 in
next three years

New Broad Band Policy announced:
30
20
17.7
10
0
5
10.5
1.5
1.6
2.4
3.1
5.5
2000
2001
2002 2003
2004

690,000 connections since April 2005
Internet subscribers 6 million (March 05)
Investment Opportunities



28.2
Among the lowest mobile tariff in the world



48.7
550,000 km of optical fibre cable laid
Setting up manufacturing facilities;
Supply of hand sets and equipments
Telecom & Value added service.
2005
(up to
Oct.)
22
Roads


Policy

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- 5000 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
23
Power


Policy & Incentive

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;
Share of Installed Capacity
Independent Regulator in most states
Investment Opportunities

Additional capacity required 100,000 MW till
2012

Investment US$120 billion needed

Financial closure of over 6000 MW capacity
achieved in last one year
Nuclear
2%
Hydro+W
ind
22%
Thermal
76%
24
Ports



Policy & Incentives

FDI up to 100% permitted for construction
and maintenance of ports and harbours.

Ten year tax holiday
Public-private partnership

12 major ports, 185 minor ports

14 private/ captive projects with investment
of US$ 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
25
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
26
Special Economic Zones

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
New Law on
SEZ enacted

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
27
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 2004-05
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
www.sezindia.nic.in
28
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%)
31
India & Other Countries - Quality of Business
Environment
THA-10
Top 1/3
IND-17
MLY-24
MLY-36
MLY-36
THA-27
CHN-30
MLY-14
THA-30
IND-31
THA-27
IND-37
CHN-46
Mid 1/3
IND-37
CHN-58
CHN-46
Bot. 1/3
State of Cluster
Development
Value Chain
Presence
Firm Level technology
Absorption
Source: Global Competitiveness Report 2003-04)
Local Supplier
Quality 32
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
33
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
34
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
35
India – A Good Place to Put Your Money
Fourth largest
Economy
(PPP) - A safe
place
to do business
Largest
reservoir of
skilled
manpower
Long-term
sustainable
Competitive
advantage
- High growth rate
economy
Largest
democracy –
political stability
& consensus on
reforms
Liberal &
transparent
investment
policies
Second Largest
Emerging Market
36
Thank You
37