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What makes India a priced Investment

Destination?
Sairaj PARAYATH

Pre-liberalization policies
India became independent on 15th August 1947 and the Indian economic policy after
independence was influenced by the colonial experience. India was faced with
serious challenges such as economic and industrial backwardness, poverty, illiteracy,
unemployment and so on. Politically, the partition of the country created a great deal
of confusion and uncertainty. Centuries of colonial rule left the country in a state of
helplessness. Indias leaders facing pressures from both Power blocs were very keen
to avoid any undue dependence on any foreign country for its sustenance .Policy
tended towards protectionism, with a strong emphasis on import substitution,
industrialization under state monitoring, state intervention at the micro level in all
businesses especially in labour and financial markets, a large public sector, business
regulation, and central planning. Five-Year Plans of India resembled central planning
in the Soviet Union. Steel, mining, machine tools, water, telecommunications,
insurance, and electrical plants, among other industries, were effectively nationalised
in the mid-1950s.Elaborate licenses regulations and the accompanying red tape,
commonly referred to as License Raj, were required to set up business in India
between 1947 and 1990 .Before the process of reform began in 1991, the
government attempted to close the Indian economy to the outside world. The Indian
currency, the rupee, was inconvertible and high tariffs and import licensing prevented
foreign goods reaching the market. India also operated a system of central planning
for the economy, in which firms required licenses to invest and develop. The
government also prevented firms from laying off workers or closing factories. The
central pillar of the policy was import substitution, the belief that India needed to rely
on internal markets for development, not international trade a belief generated by a
mixture of socialism and the experience of colonial exploitation The collapse of the
cold war deprived India of many of the advantages it had enjoyed earlier. India could
no longer count on the favorable terms of trade it had enjoyed with the Soviet Union.
Indias currency position suffered still more seriously with the marked increase in oil
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prices following the Gulf War in August 1990. Perhaps at no time in the past had the
currency situation of the country reached such grim dimensions. The government
was forced to mortgage its gold reserves to raise loans. It was under these
circumstances that it had to approach the IMF for rescue and in return accepted
several conditional ties which led to far-reaching structural changes. Sweeping
measures in external, financial and public sectors meant to put the Indian economy
on the road to liberalization and reform was implemented.
Liberalization
In July 1991, a New Industrial Policy was announced and it clearly indicated the new
path that the Indian economy was to traverse from then on. In particular, a major
policy to deregulate and promote foreign direct investment has been in effect since
then. Under the previous industrial policy regime, India discouraged foreign
investment very strongly. It also put too many restrictions on domestic competition by
means of licensing schemes and barriers to the entry of new companies. Under the
new 1991 policy, doors were opened for easier flow of foreign investment. Vital fields,
which were once closed for foreign investors like mining, oil exploration, transport,
telecommunication etc., are now open to them. The private sector can now operate in
all areas except some strategic ones like defense, atomic energy, etc. Licensing has
almost been done away with except in a very few cases. The incentives the foreign
investors now enjoy are truly impressive. Foreign equity is now granted to the extent
of one hundred per cent. For instance, keeping in mind the acute shortage of power
in the country, the government wants to attract foreign companies to power
generation sector by offering one hundred per cent equity.
Present INDIA
The economy of India is the tenth largest in the world by nominal GDP and the third
largest by purchasing power parity (PPP). The country is one of the G-20 major
economies and a member of BRICS. On a per capita income basis, India ranked
140th by nominal GDP and 129th by GDP (PPP) in 2011, according to the IMF.Back
in 1991, India saw itself battling its most critical economic and currency crisis ever.
The government then did not have many options but to take up some tough reforms.
Many barriers and restrictions were taken off. The new economic policy of 1991 was

characterized by liberalization, globalization and privatization. What followed

these radical changes is now history.
The Indian consumer market will grow 2.5 times by 2025. Consumer spending in
India grew from US$ 549 billion to US$ 1.06 trillion between 2006 and 2011, putting
India on the path to becoming one of the worlds largest consumer markets by 2025.
Indias consumption is expected to rise 7.3 per cent annually over the next 20 years.
By 2040, nine out of every ten Indians will belong to the global middle class group
with daily expenditures ranging between US$ 10 and US$ 100 per person in todays
purchasing power parity terms.
Seventy per cent of this expenditure will be on discretionary items like entertainment,
healthcare, communication, education, personal products, services and so on. The
absolute number of Indias middle class will touch 1 billion by 2039, with its influence
on global middle class consumption captured in the figure below.
This rise of Indias new middle class is globally significant as it will usher
fundamental changes in India and around the world by triggering waves of innovation
in the production, distribution and delivery of goods and services, including
government services. Innovations - like the US$ 2200 Nano car by Tata Motors, the
inexpensive hand-held electrocardiogram (ECG) machine from GE Healthcare, a lowcost water purifier called Tata Swach by Tata Chemicals, a battery-powered
ChotuKool refrigerator by Godrej, and a mobile phone application called Nokia Life
Tools by Nokia for rural consumers to access agricultural, educational and
entertainment content - are some examples of frugal engineering that are primarily
aimed at the Indian market, but will likely find buyers in many other parts of the world
as well.

Economic Growth
The growth of the Indian economy is based upon rapid urbanization, poverty
alleviation and building much-needed infrastructure. This creates significant
opportunities for foreign investment. In addition to this, India is now Asias biggest
buying economy, and has the worlds largest growing middle class. The 2011 PwC
report, Profitable growth strategies for the Global Emerging Middle (GEM) estimated
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that by 2021, India will have about 600 million people constituting its emerging middle
class segment. According to the Economic Survey 2011-12, the Indian economy is
estimated to grow at 6.9 per cent in 2011-12 and 7.6 per cent in 2012-2013. The
growth forecast has broadly been based on the rebound in the agriculture sector
which is expected to grow around 2.5 per cent. The Index of Industrial Production
(IIP) registered a robust growth of 6.8 per cent in January 2012. Output of the
manufacturing sector (which constitutes over 75 per cent of the index) grew by 8.5
per cent while the mining sector and electricity sector increased by 2.7 per cent and
3.2 per cent respectively. Industrial production expanded by 4 per cent between April
2011-January 2012.
In light of the economic uncertainties in Europe, although the Indian economy has
slowed down recently, opportunities still exist for significant growth. The biggest
problem in India has been inflation which was averaging at 9.4% in 2011. With
monetary tightening and slowing growth, inflation is expected to plateau to 8% this
year and 7.3% in 2013.
The Asian Development Bank has estimated that over the next two decades, the
middle-class population in the country will reach 1 billion. Since 2001, the Indian
middle- class has seen increases in its disposable income, and consequently,
consumption and savings have also risen. With the current rate of growth, analysts
predict that by 2025, India will become the fifth largest consumer goods market in the
world and the Indian middle-class is set to assume the traditional role of the
American and European middle-classes. This view has also been acknowledged by
the Global industry in particular. With an enhanced consumer segment in terms of
increased consumption in consumer durables furthering growth, and a positive
outlook on employment and rising incomes, this has facilitated growth in
consumption.
Indias performance has been widely acknowledged by global agencies:

India is ranked as the second most favored destination for FDI over 201012(World Investment Prospects Survey 2010-2012, UNCTAD).

India is the worlds top location for non-financial services investment and
among the top three most attractive international investment destinations (AT
Kearney 2010 FDI Confidence Index).

India ranked among the top three countries where British companies can do
better business during 2012-14 (Report by Leeds University Business School
commissioned by UK Trade & Investment (UKTI).

Offers great promise as a vital and high-potential market, securing the top
ranking in both the AT Kearneys 2009 Global Retail Development Index and
the 2009 Global Services Location Index.

Demographic advantage
India is today one of the three largest Asian economies in terms of purchasing power
parity. The median age of Indias population is 25, which in comparison to other
Asian countries, puts India in a very favorable demographic position. The United
Nations predicts that Indias working age population (15-64 years) will increase by
135 million in one decade, that is by 2020 .So while the most countries such as
Europe, China, and US will witness a decrease in workforce in the coming decades,
Indias position is strengthening, which shows the high birth rate .A young eager and
well educated work force is the key to Indias future prosperity.
Foreign Investments
The FDI regime has been progressively liberalized during the course of the 1990s
(particularly after 2000).A number of restrictions on foreign investment have been
removed and procedures have been simplified. With limited exceptions, foreigners
can invest directly in India, either on their own or as a joint venture in industries
where foreign investment is restricted. Moreover, investment ceilings, which are
applicable in certain cases, are gradually being removed / phased out. India has
witnessed a steady increase of foreign inflows over the years. FDI net inflows have
grown at a rate of over 30% compounded annually over the last decade. FDI inflows
were US$ 36.5 billion during April 2011-March2012 (US$16.0 billion in the
corresponding period of the preceding year).Portfolio inflows fell sharply from US$
31.3 billion a year earlier to US$ 3.3 billion during April-December 2011, mainly as a
result of the uncertainty and risk in the global economy in relation to the Eurozone
crisis.
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Government agencies supporting business growth

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce &
Industry, is the main government agency that facilitates investment and technology
flows by formulating and implementing policies and monitors industrial development
in India. Other agencies include state industrial corporations, investor facilitation
centres and bilateral chambers of commerce.
Invest India is the countrys official agency dedicated to investment promotion and
facilitation. Set up as a joint venture between the Federation of Indian Chambers of
Commerce and Industry (FICCI) (51% equity), DIPP (35% equity) and state
governments of India (0.5% each), its mandate is to become the first reference point
for the global investment community. It provides sector- and state-specific information
to a foreign investor, assists in expediting regulatory approvals, and offers handholding services
On 25 September 2014, Prime Minister NARENDRA MODI launched the Make in
India campaign, focusing on initiatives to facilitate investment into India and build
best-in-class manufacturing infrastructure. The scheme aims to make doing business
in India easier: reducing red tape with new de-licensing and deregulation measures,
improved infrastructure, more sectors being opened up to FDI and most importantly,
a change in mindset from the government being a permit-issuing authority to a true
business partner. Invest India will act as the first reference point for guiding foreign
investors on all aspects of regulatory and policy issues and assist them in obtaining
regulatory clearances. Its dedicated Investor Facilitation Cell will answer queries of
business entities within 72 hours. The government has identified 25 sectors in which
India can excel, details for which are available on www.makeinindia.com.

eBiz is Indias government-to-business (G2B) online portal aimed at creating an

investor-friendly business environment in India by making all regulatory information
starting from the establishment of a business, through its ongoing operations, and
even its possible closure easily available to various stakeholders. It aims to develop
a transparent, efficient and convenient interface through which the government and

businesses can interact in a timely and cost-effective manner, reducing unnecessary

delays in various regulatory processes.

Reasons to Invest in India

1. Size of India
India's GDP is currently US$1.3 trillion, making it the 8th largest economy in the
world. However, in PPP terms, which recognises India's low cost base, the GDP
notionally rises to three times this amount (US$3.8 trillion) which places it on a similar
size to Japan and, by 2013, it will become the third largest economy in the world
(after the USA and China) in PPP terms. However, despite representing 7.5% of
Global GDP (on a PPP basis) in 2010, India attracts less than 0.5% of investment
inflows. An anomaly which is unlikely to continue for much longer!
2. Economic growth
India's economy is currently growing by 8.75% per annum (in 2010) and this GDP
growth rate is expected to increase to 9% - 10% per annum for each of the next 10
years. India's GDP will grow five times in the next 20 years, and GDP per capita will
almost quadruple.
3. Diversity
The Indian economy offers investors exposure to a wide range of opportunities from
consumer goods and pharmaceuticals to infrastructure, energy and agriculture. With
its strong services sector (comprising 50% of India's economy), particularly in
knowledge-based services (IT, software and business services) India has proved that
industrialisation and the export of commodities and resources is not the only path to
rapid economic development.
4. Demographics
India is one of the youngest countries in the world, with an average age of 25 and
likely to get younger. India's working-age population will increase by 240 million over
the next 20 years. With a population of 1.2 billion, a strong work ethic, high levels of
education, democracy, English language skills and an entrepreneurial culture, India
is poised to dominate the global economy in the next 20 years.
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5. High Savings
With a savings rate of 37% of GDP, India's domestic savings fuels most of its
investment requirements, and only 20% of India's total public debt is sourced from
foreign borrowing. With significant investment to be made in upgrading India's poor
infrastructure in the next 10 years (estimated to be US$1.7 trillion) India's present
Government is taking various steps to further encourage private and foreign
investments.
6. Domestic economy
India's domestic consumption, generally led by the private sector, has played a
significant role in India's growth and is expected to remain firm as more people enter
the workforce and the emerging middle classes. India's wealthiest consumers (those
earning US$1m or more in PPP terms) will increase by 40 million in the next 10
years! Every sector within India's consumer market is booming, making India far less
vulnerable to external shocks and pressures than other emerging markets.
7. A robust financial sector
India has a robust, diversified and well regulated financial system which has allowed
it to weather the global financial crisis without any major difficulties and present an
image of quality, resilience and transparency. India's banking sector is strong, with
top quality balance sheets, high levels of competition (there are around 80 banks in
India) and strong corporate governance.
8. Quality of Investment Markets
The Bombay Stock Exchange is the second oldest in the world (165 years) and offers
investors a low cost, highly efficient, modern and well governed environment in which
to prosper from India's extraordinary economic growth. The Indian stockmarket has
generated investment returns of over 15% per annum for the last 10 years and
experts expect this rate to increase in the next decade. More significantly perhaps,
Indian investors have doubled their money over the last 3 years at a time when many
have lost money in almost every other market

Investor-Friendly Indian Market:

The Indian government made a number of policy changes during the past 1015
years to reduce the discriminatory bias against foreign investors.
Some changes are as follows:

For foreign companies, the long-term capital gains rate was reduced to 20%.

With a view to liberalize the Indian market, the Indian government has
amended the exchange control regulations that were previously applicable to
businesses having significant foreign participation.

The

government

has

also

lifted

the

ban

against

using

foreign

trademarks/brand names.

Besides, the budget for the fiscal year of 19941995 lowered the corporate tax
rate for foreign firms to 55% from 65%.

Per the Indian Income Tax Act, both Indian and foreign firms have been
exempted from export earnings.

The Indian government has introduced many other significant changes to encourage
FDIs in India. For example, the Securities and Exchange Board of India (SEBI)
recently formulated the guidelines to encourage the operations of foreign brokers, on
behalf of registered Foreign Institutional Investors (FIIs), in India. Due to this, the
foreign brokers can now set up rupee or foreign currency-denominated accounts to
credit inward remittances, brokerage fees, and commissions.
The Indian government has eliminated the condition of dividend balancing for all but
22 consumer goods industries.In addition, the Reserve Bank of India (RBI) now
allows 100% foreign investment when it comes to the construction of roads or
bridges. In the March 1995 budget, the peak custom duty rate was lowered
significantly from 65% to 50%.
CONCLUSION
Addressing the fourth Global Investors Summit in, Prime Minister Narendra Modi
said Growth and prosperity of States will eventually make India strong and
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prosperous. It is the responsibility of the Centre to encourage all States to speed

development up. The Centre has the role of helping assist States put their
development on a higher trajectory. I have emphasized this since the beginning
work like Team India comprising the Prime Minister and all Chief Ministers. With this
view, we can take the country to new heights. I have long experience as Chief
Minister and I know how the association of Centre and States can work miracles and
how disputes between them can prove to be disastrous. They are complementary to
each other. This is my message to all States. If States are ready for a project, Centre
will offer full support. And a number of steps had already been taken by the Modi
government to make it easier to do business in India along with the removal or relaxation of
foreign equity caps in several areas. The processes of applying for licences has been

made online, it is 24/7. The validity of such licences has also been extended to three
years, adding several norms and procedures have also being changed to make it
easier to do business in India. This shows despite political uncertainty, infra-structural
deficiencies, and bureaucratic hassles, India presents an optimistic scope for
overseas investment and is taking necessary steps to attract more foreign investors.
No business, irrespective of its size, that is aiming to become a global player can
afford to ignore the Indian market. With its geographical positioning in the Indian
Ocean, a major international trade route and with its rich mineral and agricultural
resources, Indias economy is witnessing and vast pool of highly skilled laborers
making it an attractive market for foreign business.
References

A Study on attractiveness of India as an Investment destination in global

market- global journals

www.investinindia.com

http://indiatoday.intoday.in/story/make-in-india-narendra-modi-red-carpetinvestors/1/392558.html

www.UNCTAD.com

http://www.worldbank.org/en/country/india/overview

Doing business in India -2014

Guide to invest in India -2013

Emerging Indian Economy -2013

Twenty years of Indias liberalization, Experiences and Lessons.

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