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

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

India among the

top reformers in
2003: World
Banks Doing
Business in 2005

Revenue deficit to be brought to zero by

2008

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 Indias

share in global merchandise trade in 5 years

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

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 MNCs & their OEMs

sourcing high-quality components from India

ATKearneys 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

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

Pre 1991

FDI up to 51% allowed under the

Automatic route in 35 Priority
sectors
Allowed selectively up
to 40%
FDI Policy Liberalization

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

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

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) - UNCTADs
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

Kearneys 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.
Sophistication
Source: Global Competitiveness Report 2003-04)

15

Indias Competitive Strengths - Human Capital

Indias 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 Indias 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

Indias Competitive Strengths HRD Contd.

Rank out of 102 countries

Availability of scientist and engineers

Quality of management schools

Quality of scientific research institutions

20

Quality of educational system

36

(Source: World Economic Forums 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 Indias total exports

High quality standards

76 SEI/CMM level 5 companies, two third
of worlds 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
India can be a major
part of Dells operations
and we are looking to
capitalize on Indias
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

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.

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;

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

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 Managements time spent in
dealing with Government agencies
(Source: World Banks Report - India Investment Climate Assessment, 2004)

World Banks 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