Foreign Direct Investment in India

Dr. Ajay Dua

Secretary Department of Industrial Policy & Promotion Ministry of Commerce & Industry Government of India 28 th November 2005 Website: www.dipp.gov.in

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Indian Economy – An Overview

Economic Performance    Sustained economic growth Average last 10 years 2004-05 Forecast up to 2006-07 Forecast till 2050 – Goldman Sachs 6.5% 6.9% >7.0% 5 % p.a.

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) Foreign Trade   Merchandise exports grew by 25% in 2004-05, now US$80 billion Imports grew by 36%, now US$106 billion Investment  Foreign Investment – over US$14 billion in 2004-05 (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 2

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 1 st 2005  only 6 states left April 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’

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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 4

Economic Reforms: Exchange Control & Taxation

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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  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 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    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 9

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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.

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Extant Policy on FDI

FDI up to 100% allowed under the ‘Automatic Route’ in all activities except for  Sectors attracting compulsory licensing    Transfer investors) of shares to 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

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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% 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.

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India: FDI Outlook

    2 nd 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 6 th 2002 2 nd most attractive destination in 2003 and 15 Most attractive destination for manufacturing th in  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 Index) Offshore Location Attractiveness 14

India & Other Countries - Policy Framework

Top 1/3

I ND-41

Mid 1/3 Bot. 1/3

MLY-67 THA-75 CHN-81 CHN-50 MLY-21 MLY-19 THA-32 I ND-35 THA-14 I ND-34 CHN-38 MLY-58 I ND-37 THA-39 CHN-72

Restriction on Foreign ownership Efficiency of Legal Framework Govt. inter. In Corporate Invest.

Financial market Sophistication

Source: Global Competitiveness Report 2003-04)

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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 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.

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India’s Competitive Strengths – HRD Contd.

Rank out of 102 countries     Availability of scientist and engineers Quality of management schools Quality of scientific research institutions Quality of educational system 3 8 20 36

(Source: World Economic Forum’s ‘Global Competitiveness Report, 2003-04’)

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ICT Advantages

IT- ITES Exports In US $ Billion 12 10 8 6 4 2 0 20 18 16 14 6.2

8 10 12.8

17.2

2000-01 2001-02 2002-03 2003-04 2004-05  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  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 18

Global Business Leaders on India

“India is a developed country as far as intellectual capital is concerned”

JACK WELCH, GE

“We are expanding our presence in India to take advantage of the ample R&D talent available”

JOHN CHAMBERS, CISCO

“India can be a major part of Dell’s operations and we are looking to capitalize on India’s human capital” “India is handling the most sophisticated projects in the world. I am impressed with the quality of work”

MICHAEL DELL, DELL BILL GATES, MICROSOFT

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Physical Infrastructure

Top 1/3

MLY-12 THA-29 MLY-7 MLY-26 THA-36 THA-41

Mid 1/3 Bot. 1/3

I CHN-55 ND-70 CHN-54 I ND-69 CHN-60 I ND-85 THA-20 I ND-47 MLY-9 CHN-68

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    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 21

Telecommunications

80 70 60 50 19.25

40 19.5

30 20 10 0 48.7

17.7

28.2

2.4

3.1

5 5.5

10.5

2000 2001 2002 2003 2004 2005 (up to Oct.)       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.

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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

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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; 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

Share of Installed Capacity

Thermal 76% Nuclear 2% Hydro+W ind 22% 24

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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

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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

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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

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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

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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

Top 1/3 Mid 1/3

THA-10 I ND-17 MLY-24 CHN-30 MLY-36 THA-27 I ND-37 MLY-36 MLY-14 THA-30 I ND-31 THA-27 I ND-37 CHN-46 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

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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 democracy – political stability & consensus on reforms Largest reservoir of skilled manpower Liberal & transparent investment policies Long-term sustainable Competitive advantage High growth rate economy Second Largest Emerging Market

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Thank You

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