Dr. Ajay Dua

1
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

2
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
  US80 billion
• Imports grew by 36, now US106 billion
• Investment
• Foreign Investment over US14 billion in
  2004-05 (FDI US5.5 billion, FII US8.9 billion)
• Mature Capital Markets
• NSE third largest, BSE fifth largest in terms of
  number of trades
• A well developed banking system

3
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
Banks Doing Business in 2005
4
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 Indias
  share in global merchandise trade in 5 years

5
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

6
Manufacturing Competitiveness- Made in India

• Second most attractive destination for
  manufacturing
• ATKearneys 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 MNCs 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

7
Evolution of FDI Policy
More sectors opened Equity caps raised in many
other sectors Procedures simplified
2000-05
Up to 100 under Automatic Route in all sectors
except a small negative list
2000
Up to 74/51/50 in 112 sectors under
the Automatic Route 100 in some sectors
1997
FDI up to 51 allowed under the Automatic route
in 35 Priority sectors
1991
Pre 1991
Allowed selectively up to 40
FDI Policy Liberalization
8
Investing in India Entry Routes
Investing in India
Automatic Route
Prior Permission (FIPB)
General Rule No prior permission required Inform
Reserve Bank within 30 days of inflow/issue of
shares
By Exception Prior Government Approval
needed. Decision generally within 4-6 weeks
9
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

10
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.

11
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

12
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

13
Foreign Technology Collaboration Policy

• Foreign technology agreements also allowed under
  Automatic route
• Lump-sum fees not exceeding US2 Million
• Royalty _at_ 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.

14
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)

15
India Other Countries - Policy Framework
MLY-21
MLY-19
Top 1/3
THA-32
THA-14
IND-35
IND-34
IND-37
THA-39
CHN-38
IND-41
CHN-50
MLY-58
Mid 1/3
MLY-67
THA-75
CHN-72
Bot. 1/3
CHN-81
Restriction on Foreign ownership
Efficiency of Legal Framework
Govt. inter. In Corporate Invest.
Financial market Sophistication
Source Global Competitiveness Report 2003-04)
16
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 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 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.

17
Indias 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 Forums Global
  Competitiveness Report, 2003-04)

18
ICT Advantages

• IT ITES Industry
• Exports US17.2 billion in 2004-05, growth of 34
  over previous year
• 2008 exports target US60 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
• RD base of over 100 FORTUNE 500 companies
• Investment Opportunities
• Collaborative ICT research
• Joint Software development in a variety of
  applications

Source NASSCOM
19
Global Business Leaders on India
India is a developed country as far as
intellectual capital is concerned
We are expanding our presence in India to take
advantage of the ample RD talent available
India is handling the most sophisticated
projects in the world. I am impressed with the
quality of work
India can be a major part of Dells operations
and we are looking to capitalize on Indias human
capital
20
Physical Infrastructure
MLY-7
MLY-9
MLY-12
Top 1/3
THA-20
MLY-26
THA-29
THA-36
THA-41
IND-47
Mid 1/3
CHN-54
CHN-55
CHN-60
CHN-68
IND-69
IND-70
Bot. 1/3
IND-85
Overall
Ports
Electricity
Air Transport
Source Global Competitiveness Report 2003-04)
21
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 (US40 billion)
• Jawhar Lal Nehru Urban Renewal Mission Rs.
  100,000 crore (US22 billion)
• Country wide rural connectivity programme to
  link all unconnected village having population of
  500 with fair weather road undertaken

22
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.

23
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 US20 billion envisaged
• Investment Opportunities
• Projects for 12,000 km would be on offer
• Many more opportunities in the States

24
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 US120 billion needed
• Financial closure of over 6000 MW capacity
  achieved in last one year

25
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 US1.6 billion
  under implementation/award
• Investment requirement of US22 billion to
  develop maritime sector
• Ports Shipping
• Inland waterways

26
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

27
Special Economic Zones
New Law on SEZ enacted

• 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

28
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 US4 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
29
Public Private Partnership

• Infrastructure projects might not be financially
  viable on their own
• Public Private Partnership to bring in private
  sector resources and techno-managerial
  capabilities
• Viability Gap Funding for
• Roads, railways, seaports, airports
• Power
• Water supply, sewerage, solid waste disposal in
  urban areas
• International convention centres.
• Funding in the form of capital grant, Operation
  Management support, interest subsidy, etc.
• Support linked with predefined milestones.

30
Food Processing

• Third largest producer of food items
• Largest milk producer
• Largest livestock population
• 2nd largest in fruits vegetables
• Opportunities in food processing sector
• 50 of household income spent on food items
• With increasing income levels and urbanisation
  fast growth in demand of processed food expected
  over 250 million strong middle class
• Low levels of value addition in food sector only
  7
• New Integrated Food Law being enacted
• Investment of US 28 billion required to raise
  food processing from 2 to 8-10.
• Investment opportunities in
• Processing of fruit vegetable, meat, fish
  poultry, milk products, packaged food drinks.
• Establishing infrastructure, cold chain, etc.

31
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)

32
India Other Countries - Quality of Business
Environment
THA-10
MLY-36
MLY-36
MLY-14
IND-17
Top 1/3
MLY-24
THA-27
THA-27
THA-30
CHN-30
IND-31
IND-37
IND-37
CHN-46
CHN-46
CHN-58
Mid 1/3
Bot. 1/3
State of Cluster Development
Value Chain Presence
Firm Level technology Absorption
Local Supplier Quality
Source Global Competitiveness Report 2003-04)
33
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

34
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

35
Investment Opportunities

• Development and management of infrastructure
• Food processing, including logistic and support
  services, development of cold chain
• Manufacturing relocation into India
• RD leveraging on abundant skilled manpower
• IT ITES, Software as well as hardware

36
India A Good Place to Put Your Money
Largest democracy political stability
consensus on reforms
Fourth largest Economy (PPP) - A safe place to
do business
Liberal transparent investment policies
Largest reservoir of skilled manpower
Long-term sustainable Competitive advantage -
High growth rate economy
Second Largest Emerging Market
37
Thank You