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About India  

Economy

Economic Review:

Even 15 years ago, India was described as a slumbering giant, or the caged tiger, with economists making derogatory references to the "Hindu" rate of growth (of 3 per cent a year). Since India stepped into the 1990s with sweeping market reforms, the average rate of economic growth has doubled. Even the nature of the economy has transformed — from primarily being an exporter of textiles and jewellery, India is now best known as an exporter of high-technology software and pharmaceuticals. There is an intimate link between the knowledge-based economy that is sweeping the global economic scene and India — from software to bio-technology, is now at the cutting edge. Real GDP growth rate in 2000-2001 is estimated at 6 per cent compared with a growth rate of 6.4 per cent achieved in 1999-2000 and 6.6 per cent in 1998-1999.

Despite a global slowdown affecting economic growth in the world, India has the distinction of being one of the fastest growing economies in the world.

In the 50 years since India became a republic, national income has increased 6.6 times from Rs 40,454 crore to Rs 2,67,551 crore, a compounded growth rate of 4.1 per cent per annum. The per capita income has increased 2.9 times from Rs 1,127 to Rs 3,212, (and in purchasing power parity terms now stands at a healthy $2390), while the GDP stands at Rs 3,11,766 crore. Inflation has stayed at remarkably low levels, hovering around 4 per cent in 2001.

Currently the fifth largest economy in the world (in purchasing power parity terms), India's economic growth as well as its economic direction have been in two distinct phases — pre-and post-1991.

Until 1991, when India initiated its wide-ranging economic reforms which altered the direction of the Indian economy, for almost half a century, it followed an improvised version of the mixed-economy model, public and private sectors co-existing, but hinged on an extensive planning process. This saw an overwhelming presence of the state in industrialization, while land reforms and the democratic experiment would simultaneously achieve social and political growth, because according to the early leaders of this country, economic growth could only be achieved along with social and political parity.

This period, therefore saw the "temples" of modern India—steel plants, dams and technological and scientific institutions. The Indian economy has grown by about 4.5 per cent per annum on a long-term basis in the second half of the 20th century, but for the most part, it hovered around the 3.5 per cent mark, which came to be known as the "Hindu" rate of growth. Domestic industries were protected through quotas. Industrial development took place in an environment when industrial licensing prevented domestic competition and trade barriers prevented competition from exports.

Although the New Industrial Policy in 1991 incorporated the emerging trends in global economy, yet India continues with it's planning process, recognizing that government support in developing infrastructure and other areas is vital for a thriving economy. The first plan between 1951-56 focussed on agriculture — by improving transport, electricity production and rural extension, to raise income levels. It wasn't until the second plan that the heavy industries began to be set up. India had missed the industrial revolution of the 19th century, and in many areas had to start from scratch. The third plan followed up on the development of basic industries consolidating the growth of previous years.

But drastic reforms had to be undertaken in 1991 because of a balance of payments crisis which called for immediate stabilization measures. Simultaneously, it was also realized that the development strategy followed till then, also called for large-scale changes. It led to the development of a market-friendly system. Except for a few strategic industries the license system was abolished. International trade was liberalized to promote competition and efficiency - by 2001 quotas and quantitative restrictions on imports had been abolished. Foreign investment is actively solicited in almost all sectors of the Indian economy, including the old shibboleths of nationalization like insurance, etc. The easing of constraints led to a steady increase in industrial growth.

The Indian economy has performed well over the past two decades. Average annual real GDP growth accelerated from 5.4 per cent during the 12 year period ending 1991-92 to 6.4 per cent during 1992-93 through 2000- 2001. During this period, it has gone through significant structural change that has been induced by a continuous process of economic reforms. The pace of reform was intensified in the 1990s and the economy has responded well to the new changes that have been introduced in most of the sectors of Indian economy during this period. As a consequence, the economy has also shown a great degree of resilience even in the presence of adversities, such as the East-Asian financial crisis of 1997-98 and the abnormal increase in oil prices more recently.

India was a founding member of the General Agreement of Tariffs and Trade (GATT), the forerunner to the World Trade Organization (WTO). India has always been a strong supporter of international trade, but has emphasized the special concerns and interests of the developing world.

It is considered one of the key voices of developing countries' concerns at international trade forums. South Asia, particularly India, has been one of the key beneficiaries of the expansion in world trade that has followed in the wake of the creation of the WTO in 1995, showing impressive gains in exports and global integration in economic systems.

Rising oil import remains a concern for economic planners, because India is fast emerging as one of the four largest consumers of energy in the new millennium. This has not only led the government to dismantle the administered price mechanism for petroleum products by making prices more compatible with world prices and focus on new exploration and production strategies but also to search for new sources of energy. The former resulted in the NELP (New Exploration and Licensing Policy) initiatives, including the Oil and Natural Gas Corporation (ONGC) investing in exploration rights overseas, from Algeria to Russia and Vietnam. It has prompted the government to diversify energy sources to natural gas, nuclear power and hydro-power as well as non-conventional energy. India is currently negotiating for a natural gas pipeline from Iran, and there are possibilities of importing gas from India's eastern neighbours like Bangladesh.

Realization of higher growth was important to raise the standard of living of various sections of people, making a substantial impact on the removal of mass poverty. The deregulation process has removed entry barriers for foreign businesses and has increased liberalization. Unlike some other countries India has resisted outright privatization and closure of unviable public sector industrial units, in view of the social upheavals it might cause. Therefore, the Disinvestment Commission was set up to divest the government of its equity in many enterprises by either strategic sales or minority holdings.

It is now believed that government should get out of the business of production and enhance its presence and performance in the provision of public goods. Government, with its elaborate bureaucratic structures, multiple layers of accountability and complex crosschecks, is unsuited to the demands of commercial production in a competitive, fast growing economy. Privatization will allow Government's capital expenditure to be allocated to public goods and basic infrastructure that is not commercially viable. A significant portion of Central capital expenditure could be reallocated this way, if all public sector units producing private goods are sold to the public. The funds received from privatization would also help in reducing the public debt incurred for setting up these units and will put the debt-GDP ratio on a sustainable path. Most importantly, privatization would enable the competitive public enterprises to function effectively once again and would help them in contributing to the national economy.

The tempo of economic reforms has been sustained through the 1990s. Major fiscal reforms were undertaken for broadening the income-tax base and streamlining the excise and customs duty structures. There were reforms in foreign investment and trade policy spheres also. Reforms in public sector enterprises are underway for reducing pressures on public finances, increasing the efficiency of public sector operations and reducing the Incremental Capital Output Ratio (ICOR). Strengthening of legal, institutional and regulatory frameworks in insurance, banking, capital markets, power and telecom are being undertaken for inducing greater private investment in infrastructure. The Union Budget for 2000-01 announced various measures for further deepening of the capital markets and financial sector and allowed private entry in insurance and provident funds.

India's heart lives in its villages. Agriculture and allied activities make the single largest contribution to the GDP i.e., 27 per cent of the total, providing employment to 65 per cent of the workforce and contributes 18.5 per cent to the total export. The agriculture sector has grown at an annual rate of 3.9 per cent. Since the stress has been on food crops (especially grain) rather than cash crops, India in 2000 became the second largest producer of wheat and rice in the world. India is also the second highest producer of fruits and vegetables in the world, producing 65 per cent of the world's mangoes and 11 per cent of the world's bananas.

This is also why rural development is a priority sector for the government aiming to remove poverty and bring in quick socio-economic progress. This is being done through development programmes that cater as much to drought-prone and desert regions as to areas susceptible to floods. The land reform policy adopted since independence aims at restructuring agrarian relations to achieve an egalitarian structure by eliminating exploitation in land relations and enlarging the land base of the rural poor.

Although India's domestic market is one of the largest in the developing world, there is now a greater emphasis on external trade, its exports registering a growth of 13.2 per cent (in dollar terms) in 2000. Exports have also diversified in recent years to include, plantations, marine products, electronic goods, gems and jewellery, chemicals, textiles, handicrafts and carpets.

But the biggest has been the growth of software industry and software exports, which touched over 50 per cent for the past couple of years. Since the new millennium opened with a global economic slowdown, India too has understandably been affected. But growth m software exports promises to cross 30 per cent in 2001 and Indian software industry is on track to achieve a $50 billion exports target by 2008. Some of the high-growth software industry segments are IT-enabled services, which include business process outsourcing and call centre businesses which have clocked impressive growth rates of 70 per cent. This is the new frontier for Indian exports — technology and knowledge-based products and services, which include software, drugs and pharmaceuticals and human-resources based services, for instance in the hospitality, nursing and education sectors. This service sector performed exceptionally well in 1999- 2000. Average growth rate of trade, hotels, transport and communications, improved from 7.1 per cent in 1998-99 to 8 per cent in 1999-2000 and that of financial, real estate and business services accelerated from 8.4 per cent to 10.1 per cent over the same period.

A new breed of skills has come to exist in the areas of technology and management which simply did not exist in 1990. While this is epitomized in the remarkable success of Indian firms in the area of information technology (IT), the extent of change is evident far beyond IT firms: the standards of efficiency among India's firms are unrecognizably different than a decade earlier.

In external trade relations, during 1999- 2000, India's trade with countries m ASEAN and East Asia region at $9,032 million grew at 14 per cent, India's exports to these countries is now growing at 31 per cent. While India's balance of trade with the West Asia region is not in its favour, due to the large amounts of crude oil that India imports, its exports to this region touched $4 billion m 1999. India's trade with the former Soviet Union was considerable, but in the past few years, its bilateral trade with Russia has dwindled, although it still counts for 80 per cent of India's total trade with countries of this region. The US is India's largest single trading partner, its exports in 1999-2000 grew at a clipping 20 per cent, whereas imports have grown at 8 per cent. The European Union is collectively the largest trading partner, accounting for 28 per cent of India's total exports and 29 per cent of her imports m 1999- 2000. In view of the many changes that have taken place, it is now quite possible for the Indian economy to attain an even higher growth path. However, crucial action is required m a number of key areas m order to obtain the full benefits of the reforms carried out so far. If these measures are accomplished in an organized manner in the near future, it is quite likely that, many of the latent energies that are yet to be released in the country would become apparent and a higher level of economic activity would emerge.

Indian Textiles - An Overview:

The Indian textile industry is one the oldest industries in the country and displays a very complex sectoral dispersal matrix with hand-spun and hand-woven sector on one end of the spectrum and the capital intensive sophisticated mill sector at the other, with the decentralised powerloom and knitting sectors coming in between.

Even in the organised sector, Oisland of excellenceO exist, using highly sophisticated information technology based equipment with facilities for ERPSAP which are second to none in the world.

The fibre specific configuration of the textile industry includes almost all types of textile fibres from natural fibres like cotton, jute, silk and wool to syntheticman-made fibres like polyester, viscose, nylon, acrylic, polypropylene and the multiple blends of such fibres and filament yarns.

The diverse structure of the industry coupled with its close linkage with our ancient culture and tradition provides it with the unique capacity to produce, with the help of latest technological inputs and design capability, a wide variety of products suitable to the varying consumer tastes and preferences, both within the country and overseas.

It is perhaps the only industry in the Indian industrial arena which is selfreliant and complete in value chain, i.e., from raw material to the highest value added products, i.e., garments made-ups.

The Indian textile industry has a significant presence in the Indian economy as well as in the international textile economy. Its contribution to the Indian economy is manifested in terms of its contribution to the industrial production, employment generation and foreign exchange earnings.

As per the data released by International Textile ManufacturersO Federation ( ITMF) for the year 1999, the Indian textile industry also contributes significantly to the world textile production capacity and availability of textile fibresyarns. This industry contributes about 21 per cent to the world spindlage and 6 per cent to the world rotorage. With ChinaOs dismantling of 10 million spindles, India has emerged as a country with highest spindlage in the world. With almost 5.64 million looms (including 3.89 million handlooms), this industry has also the highest loomage (including handlooms) in the world and contributes about 57 per cent to the world loomage. Even excluding handlooms, the industry contributes 33 per cent to the world loomage.

The industry also contributes significantly to the world production of textile fibres and yarns including jute. In the world textile scenario, it is the largest producer of jute, second largest producer of silk, third largest producer of cotton and cellulosic fibreyarn and fifth largest producer of synthetic fibreyarn.

A study of the ITMF has also indicated that the industry enjoys comparative cost advantage in raw material cost and labour cost in the production of various textile items viz-a-viz major textile producing countries.

Growth of the industry.

India has already completed more than 50 years of its independence. The analysis of the growth pattern of different segment of the industry during the last five decades of post independence era reveals that the growth of the industry during the first two decades after the independence had been gradual, though lower and growth had been considerably slower during the third decade. The growth thereafter picked up significantly during the tourth decade in each and every segment of the industry. The peak level of its growth has however been reached during the fifth decade i.e., the last ten years and more particularly in the 90s.
 

The Textile Policy of 1985 and Economic Policy of 1991 focussing in the direction of liberalisation of economy and trade had in fact accelerated the growth in 1990s. The growth during this period was spearheaded by the spinning and man-made fibre industry in the organised sector and decentralised weaving sector. In the last about ten years from 1990-91 to 2000-01.

  • The annual production of cotton from 117.00 lakh bales has now reached to 140.00 lakh bales.
  • Silk production increased from 12.56 million kgs to 15.86 million kgs.
  • Wool production increased from 42.70 million kgs to million kgs.
  • Man-made fibre production increased from 337.85 million kgs to 904.28 million kgs.


Simultaneously, with the growth in the production of textile fibres, the textile industry also achieved a remarkable growth:
 

  • The number of spinning mills has risen from 777 in 1990-91 to 2561 (inclusive of SSI) in 2001, with increase in spindlage from 26.67 million to 37.91 million (including SSI); and rotorage to 4.54 lakh (inclusive of SSI) during the corresponding period.
  • As a consequence, the production of spun yarn has increased at the rate of about 5.65 per cent to 3160 million kgs in 2001, of which cotton yarn is about 72 per cent.
  • The number of looms has increased from 13.13 lakh in 1991 to 18.02 lakh in 2001. During the period, loomage in the organised sector declined from 1.78 lakh to 1.40 lakh. Additionally handloom has grown to a loomage of 38.91 lakh taking the total loomage to 56.93 lakh.
  • Production of fabrics has grown from 23330 million sq mtrs to 40256 million sq mtrs during the period. With increase in the production of man- made fibres and fabrics, the mix has also been changed. Cotton, earlier was about 66 per cent of the fabric production, has fallen to 49 per cent, the balance coming from blended and synthetic fabric.
  • Fabric production profile, earlier showing 11 per cent as coming from the organised mills has changed with the growth of powerlooms to show 4 per cent from the mills, 59 per cent from powerlooms, 17 per cent from knitting and 19 per cent from handlooms.


Growth of Exports.
 

Through export friendly government policies and positive efforts by the exporting community, textile exports increased substantially from US$ 5.07 billion in 1991-92 to US$ 12.10 billion during 2000-01. The readymade garment sector is the biggest segment in the IndiaOs textile export basket contributing over 46 per cent of total textile exports. Exports of cotton based items continue to pre-dominate which is natural in view of IndiaOs competitive advantage in terms of cotton.

Textile trade, over the last decade has contributed substantially in realising IndiaOs overall export trade. Its share in world textile trade has risen to 3.1 per cent in 1999-2000 as against 1.80 per cent in early nineties. Exports have grown at an average of 11 per cent per annum over the last few years, while world textile trade has grown only about 5.4 per cent per annum in the same years.

Perfomance of the Industry during the year 2000-01.

The growth of most segments of the industry during the year 2000-01 has been positive.

  • The production of cotton declined from 156 lakh bales in 1999-2000 to 140 lakh bales during 2000-01.
  • Production of man-made fibre increased from 835 million kgs in 1999-2000 to 904 million kgs during the year 2000-01 registering a growth of 8.26%. Among the man-made fibres, polyester staple fibre is predominant fibre contributing about 63% of the total man-made
  • fibre production; VSF, though registered the highest growth i.e., 17 per cent during last year.
  • The production of spun yarn increased to 3160 million kgs during 2000-01 from 3046 million kgs during 1999-2000 registering a growth of 3.7%.Among the spun yarn, cotton spun yarn is the predominant yarn contributing about 72% of the total spun yarn production in the country.
  • The production of man-made filament yarn registered a growth of 2.91% during last year, increasing from 894 million kgs to 920 million kgs. Polyester filament yarn is the major filament yarn contributing about 89% of the total filament yarn production in the country.
  • The production of fabric registered a growth of 2.7% during last year, increasing from 39,208 million sq mtrs to 40,256 million sq mtrs. The production of mill sector declined by 2.6% while production of handloom, powerloom and hosiery sector increased by 2%, 2.7% and 5.1% respectively.
  • The exports of textiles and garments increased from Rs. 455048 million to Rs. 552424 million, registering a growth of 21%.


The textile industry in our country is one of the few industries in the country which has the potential to emerge as a true global player. The Government has already embarked on a role of industry-friendly, pro-active NfacilitatorO. Recognising the fact that industry needs a concerted strategy and time-bound action plan to convert its core competence in availability of all major raw materials, skilled manpower, managerial competence and entrepreneurial skill to a competitive strength as a producer and supplier of top quality textiles at competitive prices while protecting its domestic turf, the Government has initiated many policy measures. With the growing awareness in the industry of its strengths and weakness and the need for exploiting the opportunities and averting threats, coupled with the GovernmentOs catalytic role, the Indian textile industry has the potential to scale new heights in the globalised economy.
 
Investments in India:

The economic reform programme that was embarked upon in India in 1991 has made significant progress. Successive governments have given greater scope, content and direction to this process. Today the industrial policy is far more simple, more liberal and transparent, actively promoting private investments including foreign investment.

Particular focus has been given to the infrastructure sector with special incentives to attract greater investments. External trade has been freed of various controls and the tariffs steadily reduced. Import controls on few of the consumer products are also proposed to be freed within a fixed time frame. Exchange rate policies have been significantly liberalised. The Indian rupee is convertible on the current account. Both personal and corporate tax rates have been brought down significantly and the capital market has witnessed fundamental changes.

For a foreign investor, India has many strengths:

  • A large market with a population of about 950 million of which over 300 million are estimated among its growing middle class.
  • An abundance of natural resources, a rich mineral base and is agriculturally self-sufficient.
  • A stable democratic environment in over 50 years of independence.
  • A free press and a strong and independent judicial system.
  • English is the language of commerce and administration.
  • It has experienced stable growth with macro-economic stability. Gross domestic product growth has averaged between 6% and 7% over the last few years.
  • It is the fifth largest economy in the world in terms of purchasing power parity, with a diversified manufacturing base.
  • A high rate of domestic savings of over 26 per cent of GDP and comfortable foreign exchange reserves of around US$25 billion.
  • A strong and mature private sector.
  • A sophisticated R&D [Research and Development] infrastructure and world class institutions in education and research in technology, engineering and management.
  • High quality managerial and supervisory personnel are easily available.
  • India offers competitive wage levels and a harmonious climate of industrial relations.
  • There is a sophisticated financial sector with an extensive banking network and a well-developed capital market.
  • India is a member of MIGA [the Multilateral Investment Guarantee Agency], and has entered into bilateral investment promotion and protection agreements with many countries. The country has also signed Bilateral Double Taxation Avoidance Conventions with several countries.
  • India could be an ideal gateway to the larger SAARC [South Asia Association for Regional Cooperation] market in the context of the South Asian Free Trade Area (SAFTA) to be established by the year 2001.


Vast opportunities exist for investment in the various sectors and in the 26 States and six Union Territories of India. In the area of infrastructure alone investment needs are in the range of US$400 billion in the next ten years which cannot be mobilised from domestic sources alone. An attractive framework for foreign investment has, therefore, been put in place.

QUESTIONS AND ANSWERS FOR THE FOREIGN INVESTOR

To help provide all the information necessary for the foreign investor planning to invest in India here are a selection of the most frequently asked questions: click on any of the following questions to go straight to its answer.

How does a foreign company invest in India?

There are two approaches. Either through automatic approval by the country's central bank - the Reserve Bank of India - in Mumbai or via the Foreign Investment Promotion Board (FIPB) or the Secretariat for Industrial Assistance (SIA).

What is the Secretariat for Industrial Assistance (SIA)?

The SIA is part of the Department of Industrial Policy and Promotion of the Government which provides a single window for entrepreneurial assistance and processes all applications which require Government approval. The SIA acts as the Secretariat for all applications for:

  • Foreign direct investment [FDI]
  • NRI Investments
  • Foreign technology transfer
  • Setting up 100% export-oriented units [EOUs]
  • Industrial licenses


How does automatic approval from the Reserve Bank of India work?

Automatic approval from the Reserve Bank of India is granted to foreign investors if the FDI equity of the company does not exceed a specified percentage. That figure is 74 per cent in several areas in nine industry groups:

  • Mining services;
  • Basic metals and alloys industries;
  • Manufacturing medical and laboratory equipment and photography;
  • Electric generation and transmission;
  • Non-conventional energy generation and distribution;
  • Construction;
  • Pipeline transport excluding crude oil, petroleum products and natural gas pipelines;
  • Water transport;
  • Storage and warehousing services.


For other industries the figure is 51%, such as metallurgical, boilers and steam generating plants, prime movers, electrical equipment, transportation, industrial machinery and equipment, agricultural machinery, drugs, printing machinery, food products, cotton textile (cotton spinning integrated mills), the manufacture of wool and silk, basic chemical products (except products of petroleum and coal); the manufacture of metal products and parts except machinery and equipment, health and medical services; and land and water transport (support services). In industries such as the mining of iron and other metal ores and non-metallic minerals with the exception of the Uranium group the figure is 50%.

A full list in each of these cases can be viewed at: http://www.nic.in/indmin/annex3.htm External website that opens in a new window

The Reserve Bank of India also accords automatic approval to foreign technology agreements within the prescribed monetary limits:
 

  • Lump sum payments of up to $2 million
  • Royalty payments of up to 5% of domestic sales and 8% of exports


What is the Foreign Investment Promotion Board (FIPB)?

What is the role of the FIPB compared to the individual state investment boards?

The FIPB is a high-level single window agency to clear all proposals relating to foreign direct investment (with or without technology transfer) which are not eligible for automatic approval. The organisation has the flexibility of purposeful negotiation with investors and considers project proposals in totality and free from parameters. It makes a recommendation on each proposal which is approved by the Government and its decisions are communicated within six weeks by the Secretariat for Industrial Assistance, which functions as its secretariat.

How are applications for foreign direct investment submitted?

1) Applications for automatic approval can be submitted in Form PC to:

The Reserve Bank of India
Exchange Control Department
Shaheed Bhagat Singh Road
Mumbai - 400023

No fee is required and approvals are given by the RBI within 15 days.

A sample of the form may be seen at: http://www.nic.in/indmin/cmbform.htm External website that opens in a new window

2) Foreign Investment Promotion Board approval is required for all other proposals not eligible for automatic approval. Applications must be submitted in Form FC (SIA) or on plain paper to:

The Secretariat for Industrial Assistance
Ministry of Industry
New Delhi
Fax: +91 11 301 1034
email: iisdcsansad.nic.in

Website:http://www.dipp.nic.in External website that opens in a new window

What are the factors considered by the Foreign Investment Promotion Board when examining proposals?

To impart greater transparency to the approval process, guidelines have been issued which govern the consideration of FDI approvals by the Foreign Investment Promotion Board. The FIPB's clearance is based on the totality of the package including such factors as the industry involved, the type of technology, foreign exchange inflows and outflows and employment generation. A full text of the guidelines may be seen at:http://www.nic.in/indmin/ANNEX4.HTM External website that opens in a new window

What are the incentives available for companies engaged in export activities?

Trading companies primarily engaged in export activities are allowed majority foreign equity holding up to 51% by the Reserve Bank of India. Such trading companies will be treated on par with domestic trading and export houses in accordance with the export/import policy, details of

which are available at: www.rbi.org.in  External website that opens in a new window
Banking - Non-Resident Indians 40%. Foreign investment of up to 20% is allowed.

  • Power - Up to 100% foreign investment allowed. Full details are available at: www.powermin.nic.in External website that opens in a new window
  • Telecommunications (Basic and Value-added) - In basic, cellular mobile and paging services, foreign investments are limited to 49% subject to a grant of license from the Department of Telecommunications.
  • Drugs and pharmaceuticals - foreign investments of up to 51% in the case of bulk drugs, their intermediates and formulations thereof are granted automatic approval by the Reserve Bank of India. The exceptions are those produced by the use of recombinant DNA technology. Other proposals are considered on merit on a case-by-case basis by the Government. Manufacturing activity essential for foreign direct investment above 51% as per Drug Policy.
  • Petroleum - 100% FDI is allowed in small fields through competitive bidding, while refinery, product pipeline sector, infrastructure relating to the marketing of petroleum products and trading are all open for foreign investment with different ceilings.
  • Roads and Highways - Private sector including foreign equity participation of up to 100% in highways is envisaged on a Build Operate and Transfer (BOT) concept. There is automatic approval of up to 74% FDI by the Reserve Bank of India. Further details including current opportunities are available at:www.morth.nic.in External website that opens in a new window
  • Ports - Up to 100 % FDI is allowed for BOT projects and approval is automatic for up to 74% FDI by the Reserve Bank of India.
  • Tourism - This sector has immense possibilities for foreign investment. 100% foreign equity is allowed in the sector and automatic approvals are also granted by the Reserve Bank of India for foreign equity up to 51% and subject to specified parameters.
  • Real estate - No FDI is allowed (except from NRIs / OCBs).
  • Mining - Automatic approval is available up to 50% foreign direct investment in this sector with the exception of mining of gold, silver and precious stone. They are subject to certain other parameters. Coal and lignite are reserved for the public sector though FDI is allowed for captive power generation.


Is foreign direct investment allowed in small and medium sized enterprises?

Equity participation of up to 24% of total share holding has been allowed in Small Scale Industry (an SSI unit is where plant and machinery investment is up to Rs30 million). For equity participation in excess of this or if a non-SSI unit wishes to manufacture a reserved item, the prescribed export obligation of 50 per cent is to be undertaken by the unit.

Are foreign investors allowed to raise their equity in an existing joint-venture?

Yes. Approval is accorded both on the automatic and Foreign Investment Promotion Board (FIPB) routes subject to specified conditions. Enhancement may be allowed as part of an expansion programme and the money to be remitted should be in foreign exchange. (For details the SIA manual available at the SIA website may be consulted)

Can profits, dividends, royalties or know-how payments be repatriated from India?

Yes. Foreign capital invested in India, profits and dividends earned in India, royalties and know-how payments that have been approved by the Government/Reserve Bank of India, can be repatriated after payment of taxes due on them. Units operating in a limited list of consumer goods industries, however, are subject to the condition of dividend outflow being balanced with the matching inflow of export earnings for seven years from the date of commercial production.

Is it possible to use foreign brand names or trade marks in India?

Yes

What proposals require an Industrial License and how is one obtained?

In the new Industrial Policy, all industrial undertakings are exempt from licensing except for nine industies in areas of strategic and environmental concern and those reserved for the public sector and the small scale sector. For the exemption to apply, the project should not be located within 25km of a city with a population of more than 1 million. At the same time, the Government has also substantially liberalised the procedures for obtaining an industrial licence.

Is labour an issue for the foreign investor?

There is a ready availability of skilled manpower, with a high standard of productivity. Various vocational institutes and industrial training institutes have ensured a steady supply of such trained manpower. Unskilled labour is also available at competitive wages all over India.

How easy is it to find a joint venture partner in India?

How does a foreign investor find a Joint Venture partner?

Indian business enterprises are active in practically every sector of the economy and it is possible to find a suitable joint venture partner for most projects. Apex business organisations and chambers of commerce including the following can also help in identifying suitable joint venture partners:

Confederation of Indian Industries [CII]
Business Development Cell
23 Institutional Area, Lodi Road
New Delhi - 110003
email: Vijayasoi.cii.ernet.in

Website: http://www.indiaindustry.com External website that opens in a new window

Federation of Indian Chambers of Commerce and Industry [FICCI]
Investor Guidance Services
Federation House, Tansen Marg
New Delhi - 110001
email: ficci.bisnetgems.vsnl.net.in

Website: http://www.indiainbusiness.nic.in External website that opens in a new window

The Associated Chambers of Commerce and Industries of India [ASSOCHAM]
2nd Floor, Allahabad Bank Building
17, Parliament Street
New Delhi - 110001
email: raghuramansansad.nic.in

Website: http://www.assocham.org External website that opens in a new window

Whom should the foreign investor contact for further information?

How does a foreign investor find a joint venture partner?

Secretariat for Industrial Assistance
Department of Industrial Policy & Promotion
Ministry of Industry
New Delhi - 110011
Fax: + 91 11 301 1034
email: iisdcsansad.nic.in

Website: http://www.dipp.nic.in External website that opens in a new window

Investment Promotion and Publicity Division
Ministry of External Affairs
Government of India
South Block
New Delhi - 110011
Tel: + 91 11 301 8709/3902/4367
Fax: + 91 11 301 0700/0680
email: jsippmea.delhi.nic.in

Website: http://www.mea.gov.in/ External website that opens in a new window

Commercial wings in Indian Embassies and Missions abroad will also be ready to assist foreign investors in facilitating their efforts to invest in India.

Sectoral enquiries can also be addressed to the following:

Ministry of Power
Shram Shakti Bhawan
Rafi Marg
New Delhi - 110001
Tel: + 91 11 3310247
Fax: + 91 11 3717519
Website: www.powermin.nic.in External website that opens in a new window

Department of Telecommunications
Sanchar Bhawan
20, AshokaRoad,
New Delhi - 110001.
Tel: + 91 11 3717542
Fax: + 91 11 3718288

Ministry of Surface Transport (Roads and Ports)
Transport Bhawan
New Delhi - 110001
Tel: + 91 11 3715905
Fax: + 91 11 3731270
Website: www.morth.nic.in External website that opens in a new window

Ministry of Civil Aviation
Rajiv Gandhi Bhawan
Safdarjang Airport
New Delhi

Tel: + 91 11 4610363
Fax: + 91 11 4697051

Ministry of Food Processing Industries
Panchsheel Bhawan
August Kranti Marg
New Delhi - 110049
Tel: + 91 11 649 3012/469 2476
Fax: + 91 11 649 3228
email: mofpihub.nic.in

Website: http://www.mofpi.nic.in/ External website that opens in a new window

Other related websites:

Ministry of Finance: http://www.finmin.nic.in External website that opens in a new window

Ministry of Commerce: http://www.commerce.nic.in External website that opens in a new window
Reserve Bank of India: www.rbi.org.in External website that opens in a new window

What are the focal points of the State Governments?

The focal point for each State Government or Union Territory (UT) is normally its Ministry of Industry. Many State Governments have announced attractive incentives in the form of capital subsidies, sales tax concessions, concessional power tariffs and exemption from certain other charges or taxes among others. The State Industrial Development Corporations help foreign investors by providing information and guidance in selecting projects and their location, arrangement of infrastructure facilities through concerned Government agencies and also follow up with the State and Central Government Departments and Corporations.

Sectors - Key sectors for investment

What areas of the economy is the government prioritising for foreign investment?

Following are a series of sector summaries for key parts of the Indian economy. Not only do they provide a concise overview of the size and significance of these sectors but also they give details on the investment opportunities available within them.

How do Indian embassies help foreign investors facilitate investment in India?

The Automotive Industry

Automobile Plant

Overview

The automotive industry in India has undergone a rapid transformation in the last few years. From a small industry sector held by a few traditional monopoly units, it has been able to evolve into one of the most dynamic sectors of the Indian economy, driven by market forces. This has been brought about through the liberalisation of the Indian economy. Brimming with change and challenges, the automotive sector is not only encouraging domestic manufacturers to compete in a market which is already flooded with major global players but is also attracting many more global majors to enter the fray.

Until the end of the 1940's, motor vehicles were all imported into India. Some 20,000 vehicles were imported by General Motors and Ford at the time. The seeds for local manufacture were sown by the establishment of two vehicle manufacturing plants, Hindustan Motors in 1942 and Premier Automobiles in 1944. However a major revolution was brought about in 1953, when the Indian Government prohibited the import of cars and assembly activities by foreign car manufacturers. This was to jump start the local production of vehicles via the establishment of a component manufacturing base.

The 1960's and 70's saw the entry of new manufacturers of commercial vehicles. These were: Bajaj Tempo, Tata Engineering Locomotive Company and Mahindra & Mahindra. This markedly improved the output of commercial vehicles.

There was a major influx of Japanese investments in the 80's. The most notable was the joint-venture between the Suzuki Motor Corporation and the Indian Government - called Maruti Udyog Ltd. A number of other Indo-Japanese joint-ventures were also set up in the private sector. Honda, Yamaha, Toyota and Mitsubishi all made an entry during this period to manufacture two-wheelers and light commercial vehicles.

In 1996 - 97 the sector achieved an overall growth rate of 14 per cent; in 1997 - 98 there has been a slight slow down, seeing marginal negative growth. With the predicted economic revival being backed by significant projected private and public infrastructure investment along with a reduction in interest rates and new credit policies creating new investment opportunities, demand for automobiles is expected to increase. Capacity and production is forecast to double in the next five years.

FDI policy in the automotive sector

Commercial vehicles as well as auto components have been categorised as priority sectors for Foreign Direct Investment [FDI]. For foreign equity participation up to 51 per cent equity, the Reserve Bank of India accords automatic approval. For equity participation greater than this, each proposal is considered by the Foreign Investment Promotion Board [FIPB].

Some of the joint ventures in the passenger car sector envisage the initial importing of cars in either semi-knocked down [SKD] or completely knocked down [CKD] form. Whilst the Government has decided to grant the required licences to approved joint ventures in the automotive sector, they are required to give details about their import programme, their indigenisation plans and future export possibilities. Each must sign a memorandum of understanding with the Directorate General for Foreign Trade [DGFT] in this respect. This Memorandum needs to be based on the following undertakings:
 

  • The establishment of actual production facilities for the manufacture of cars and not for mere assembly of imported kits or components
  • Minimum foreign equity participation of US$50 million to be invested by the foreign partner within the first three years from the start of operations, if the joint venture involves majority foreign equity ownership. This condition applies only to new joint venture companies.
  • The indigenisation of components up to a minimum level of 50 per cent in the third year [or earlier] from the date of clearance of the first import consignment of SKD/CKD kits or components, and up to a level of 70 per cent in the fifth year [or earlier]. Once the joint venture operation has reached an indigenisation level of 70 per cent, there will be no need for further import licences from DGFT. Once the firms have achieved the 70 per cent indigenisation level they automatically move outside the ambit of the Memorandum. However, each must discharge their export obligations corresponding to the imports made by them up to that time.
  • In terms of export obligations, firms entering into the Memorandum of Understanding should achieve a broad neutralization of foreign exchange over the entire period of the Memorandum in terms of balancing between the actual CIF value of imports of CKD/SKD kits or components and the FOB value of the cars and/or auto components over the said period. The period of export obligation would commence from the third year of commencement of production. The date of commencement of production would be deemed to be the date of the first release of a consignment from the factory after payment of excise duty, although there would be a two year moratorium from this date of production commencement when the company need not fulfil any export commitment. Then, from the third year onwards [effective from the date of release of the first consignment], the joint venture company would have an export obligation equivalent to the CIF value of imports made by them for the remainder of the MOU period until they complete the entire export obligation. From the fourth year onwards, the value of imports of CKD/SKD or components may be regulated with reference to the export obligation fulfilled in the previous years, as per the Memorandum of Understanding. The export commitment can be met by the export of both cars and auto components. It should also be noted that this export obligation is over and above any EPCG [Export Promotion Capital Goods Scheme] related export obligation.

The underlying idea for this is to discourage "screwdriver technology" and to have an assurance that the joint venture partners have long term commitments to the projects. This requirement does not apply to other categories of vehicle, such as tractors, commercial vehicles etc.

Outlook

On account of the strong linkage the automobile industry has with other industries - such as agricultural operations - investment in this industry can act as a catalyst for overall economic development, employment generation and the development of business and commercial activities. An expanding manufacturing base of vehicles also leads to the development of components and ancillaries with a multiplier effect.

Since the development of India's railway rolling stock and rail infrastructure is constrained by heavy capital costs, road transport is expected to grow alongside the economy's revival and the development of road infrastructure by the private sector.

Given the long term growth forecasts for the economy and, in particular, the transformation of the rural economy, demand for automobiles is predicted to grow strongly.

The establishment of large, modern manufacturing units by foreign companies, benefiting from significant economies of scale, will also increase exports.

The long term increase in income levels, the concomitant increase in the standard of living across an ever-growing middle-income group within India, plus easier access to credit financing for vehicle acquisition, will all help to spur growth in this sector. These forces will help to make the projected turnover of Rs 2,500 billion in 2005 for the automotive industry a reality.

VEHICLE PRODUCTION TARGETS [Quantity in thousand units].
 

Category of vehicles:1997-981998-991999-00
Passenger Cars550630750
Utility Vehicles130140150
Light Commercial Vehicles135160200
Buses & Trucks160180200
Tractors230240250
TOTAL (4 WHEELERS)120513501500
Scooters154017001800
Motorcycles9009501000
Mopeds700750800
Three Wheelers180 490200
TOTAL (2 & 3WHEELERS)332035903800
TOTAL (ALL VEHICLES)452549405300


Contact

Joint Secretary
Automotive Division
Ministry of Industry
Department of Industrial Policy & Promotion
Udyog Bhawan,
New Delhi - 110011

Tel: 91-11-301 2750
Fax: 91-11-301 2655

The Auto Component Industry

Overview

The origin of the Indian auto component industry dates back to 1953, when the Indian Government decided to develop its own manufacturing base with the principal intention of import substitution. The Indian auto component industry today is a very vibrant sector of the Indian economy and is a net foreign exchange earner for the country.

The principal feature of the Indian auto component industry is that it is a high investment sector of the Indian economy using state-of-the-art technology, serving a large number of vehicle models.

There are over 350 major companies in the auto component sector. Most of them are evenly distributed in the north, south and western parts of India. There are very few component manufacturers in the eastern region and therefore this region is a very marginal contributor to the country's output for auto components.

Over the years the industry has very successfully fulfilled its mandate of maximising the percentage of locally manufactured content used by the Indian automotive industry. India is probably the only country in Asia after Japan which has developed its own car from its own component base.

Exports

The auto component industry in India has been consistently exporting an average of about 20 per cent of its production over the last few years. The industry's exports in 1995-96 stood at US$255 million as against US$207 million in 1994-95 (representing growth of 23 per cent). On the basis of the data available, it is estimated that the growth in exports in the next five years is going to be 20 per cent annually.
 

18

Year Value [US$ millions] Growth [%]
1991 - 92127-
1992 - 9316328
1993 - 94193
1994 - 95 207 7
1995 - 96 255 23
 1996 - 97 * 30620
1997 - 98 * 36620
1998 - 99 *437 19
1999 - 2000 * 51418
 
 
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