1

Dr. Ajay DuaDr. Ajay DuaSecretarySecretary

Department of Industrial Policy & PromotionDepartment of Industrial Policy & PromotionMinistry of Commerce & IndustryMinistry of Commerce & Industry

Government of IndiaGovernment of India

2828thth November 2005 November 2005Website: Website: www.dipp.gov.in

Foreign Direct Investment in India

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Indian Economy – An Overview Economic Performance

Sustained economic growth­ Average last 10 years 6.5%­ 2004-05 6.9% ­ Forecast up to 2006-07 >7.0%­ Forecast till 2050 – Goldman Sachs 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

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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’

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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

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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

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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

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Evolution of FDI Policy

Pre 1991

1991

1997

2000

2000-05

Allowed selectively up to 40%

Up to 74/51/50% in 112 sectors under theAutomatic Route 100% in some sectors

Up to 100% under Automatic Route in all sectors except a small negative list

More sectors opened ; Equity caps raised in many other sectors Procedures simplified

FDI Policy Liberalization

FDI up to 51% allowed under the Automatic route in 35 Priority sectors

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Investing in India – Entry Routes

Automatic Route Prior Permission(FIPB)

Investing in India

General RuleNo prior permission requiredInform Reserve Bank within 30 days ofinflow/issue of shares

By ExceptionPrior Government Approval needed.Decision generally within 4-6 weeks

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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

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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 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

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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%

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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 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)

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India & Other Countries - Policy Framework

Restriction on Foreign ownership

Efficiency of Legal Framework

Govt. inter. In Corporate Invest.

Financial market Sophistication

IND-41

IND-35 IND-34IND-37

MLY-67

MLY-19

MLY-58

MLY-21

THA-75

THA-32 THA-14

THA-39

CHN-81

CHN-50 CHN-38

CHN-72

Top 1/3

Mid 1/3

Bot. 1/3

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 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’)

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ICT Advantages

IT- ITES ExportsIn US $ Billion

6.2

10

12.8

17.2

8

0

2

4

6

8

10

12

14

16

18

20

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

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Global Business Leaders on India

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

“India can be a major part of Dell’s operations and we are looking to capitalize on India’s human capital”

“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”

JACK WELCH, GE JOHN CHAMBERS, CISCO

MICHAEL DELL, DELL BILL GATES, MICROSOFT

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Physical Infrastructure

Overall Ports Electricity Air Transport

IND-70 IND-69

IND-85

IND-47

MLY-12MLY-7

MLY-26

MLY-9

THA-29

THA-36THA-41

THA-20

CHN-55 CHN-54CHN-60

CHN-68

Top 1/3

Mid 1/3

Bot. 1/3

Source: Global Competitiveness Report 2003-04)

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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

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Telecommunications

1.6 3.1 5.510.5

28.2

48.7

1.5 2.45

17.7

19.5

19.25

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005(up toOct.)

No.

in m

illio

n

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

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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

Hydro+Wind

22%

Thermal76%

Nuclear2%

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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

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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

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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

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

New Law on SEZ enacted

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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%)

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India & Other Countries - Quality of Business Environment

State of Cluster Development

Value Chain Presence

Firm Level technology Absorption

Local Supplier Quality

IND-17

IND-37IND-31

IND-37

MLY-24MLY-36 MLY-14

MLY-36THA-10

THA-27 THA-30THA-27

CHN-30

CHN-46 CHN-58CHN-46

Top 1/3

Mid 1/3

Bot. 1/3

Source: Global Competitiveness Report 2003-04)

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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

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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

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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

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India – A Good Place to Put Your Money

Second Largest Emerging Market

Largest democracy –

political stability & consensus on

reforms

Liberal & transparent investment

policies

Fourth largest Economy

(PPP) - A safe place

to do business

Largest reservoir of

skilled manpower

Long-term sustainableCompetitive advantage

- High growth rate economy

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Thank You