India’s Foreign Direct Investment Environment (U.S. Commercial Service)

By: Montranique Runnels& Gabriella Resendez

● The United States and India share a strong and growing commercial and economic relationship, driven by entrepreneurs and businesses in both countries

● Cumulative Indian foreign direct investment in the United States totaled $7.8 billion in 2014

● U.S. foreign direct investment into India was $28 billion

●Ongoing government actions to facilitate trade in both directions and open new sectors to private investment○will continue to accelerate economic growth

and development○ increase prosperity for the citizens of both our

countries

• India is one of the fastest growing economies in the world.

• ranked in top 3 attractive destinations for inbound investment

Quick Facts

Make In India• Encourage multinational as well as domestic

companies to manufacture in India.

• Launched September 25, 2014 by Prime Minister

Narendra Modi

• Job creation and skill enhancement for 25 sectors

(automobile, aviation, pharmaceuticals, bio-

technology, etc.)

• Hopes to attract capital and technological

investment in India

Sectors of Investment• Automobile

• 2016, third largest automotive market by volume, 5% global sales• Growing domestic demand• 45% of India’s manufacturing GDP, employs 19 million• Suzuki, Nissan, Toyota, General Motors, Ford, BMW

• Food Processing• Ranked 6th in 2013 for exports of agricultural products• 2013 ranked #1 bananas, mangoes, papayas, lemons, etc.• 127 agro-climatic zones in India• cost of skilled man-power is extremely low• Kraft, Nestle, Pepsi, Kellogg's, Hershey's, Coca-Cola

• Textiles and Garments• Largest cotton producer in the world• 2nd largest silk producer• 59% of the world’s market share• one of the largest sources of employments• Levi’s, Forever 21, Espirit

Top 5 Countries Investing in India in 20145) United Arab Emirates

-153 investments between 2013 and 2014

4) Germany

-Volkswagen plans to invest $250 million in India over the next 5 years

3) United Kingdom

-$1.9 billion offer to take over Vijay Mallya’s United Breweries

2) Japan

-10 year investment plan starting with a purchase of $627 million in e-commerce, Snapdeal

1) United States of America

-Cisco systems has $40 million to invest in Indian startups

Why Invest in India?1. GDP Growth

-Similar to China’s, but may beat them in 2016 if it grows over 7.5%

2. Raghuram Rajan

-focused on managing inflation, lower interest rates

-Strengthening of the Rupee

3. Corporate Earnings

-Bloomberg data estimates average corporate earnings for the MSCI India Index to be over 16%.

4. The Earlier the Better

-Current investment in India is recommended

● On August 17, 2014 Prime Minister Modi announced his Make in India initiative○ branded campaign to attract international capital to the

country’s struggling manufacturing sector

● Decentralized nature of India’s political system○ Investors in India should be prepared to face varied

political and economic conditions■ 29 states and 7 union territories

Differences in:

● quality of governance● regulation● taxation● labor relations● education levels

• Foreign Direct Investment screening is undertaken by the Foreign Investment Promotion Board

• The Board is empowered to co-opt Secretary-level government functionaries and other top officials of financial institutions, banks, and professional experts as required

• Minister of Finance approves FIPB decisions on investments up to USD 200 million

• larger investments require approval from the Cabinet Committee on Economic Affairs

• Government has managed to push through a number of investor-friendly reforms

• ex: an increase in foreign direct investment limits in insurance from 26% to 49%

• But, objective conditions for doing business in India remain similar to years past…

• many sectors also require multi-step process for central and state approval

● India prides itself on its rule of law

● However, ranks 186 out of 189 in the World Bank’s, Ease of Doing Business Report in the category of Enforcing Contracts○ Courts have cases backlogged for

years

• Industrial sectors globally recognized for their innovation and competitiveness:

• information technology• telecommunications• engineering

• Foreign companies operating in India highlight that success requires:

• a long-term planning horizon• state-by-state strategy to adapt to the

complexity and diversity of India’s markets

• 2 channels for foreign investment entering India• Automatic route- not required to seek overall approval from the

central government• misnomer because investments in most sectors still

require some amount of interaction with the government at both the state and national levels

• Government route-subject to authorization from the principal ministry involved and potentially the Foreign Investment Promotion Board

• rules vary from industry to industry and the approving government entity varies depending on the applicant and the product

• 100% FDI is allowed in most categories of manufacturing

• Government does maintain set-asides or micro and small enterprises (defined as companies with less than USD 1 million in plant and machinery assets)

• Investments in manufacturing that do not qualify as MSE must enter via the government route for FDI greater than 24%

• Fast track investment proposals from the United States• Inter-Ministerial Committee led

by the Department of Industrial Policy and Promotion

• meets informally and on an ad-hoc basis as they receive reports from business chambers and affected companies of stalled projects

• All new investments require a number of industrial approvals and clearances from different authorities

• Pollution Control Board• Chief Inspector of Factories• Electricity Board• Municipal Corporation

(locally elected entities)

• Previous and current governments have progressively opened the county up to greater FDI (foreign direct investment), the overall attitude remains mixed

• Limits on foreign ownership and control vary by sector and industry

Sources:

http://www.state.gov/r/pa/prs/ps/2015/09/247174.htm

http://mays.tamu.edu/center-for-international-business-studies/wp-content/uploads/sites/14/2015/09/India-Investment-Climate-Statement-2015.pdf

https://www.youtube.com/watch?v=ydhFCzilGGg

http://www.makeinindia.com/policy/foreign-direct-investment

http://www.forbes.com/sites/kenrapoza/2014/11/15/u-s-leads-top-15-countries-investing-in-india/

http://www.forbes.com/sites/kenrapoza/2015/03/05/five-reasons-to-invest-in-india/