India has come a long way since its
independence in 1947. Its economy has been characterized by a diversified
industrial base, a growing, world-class IT and software development sector and
a relatively large and sophisticated financial sector, with a population of
over one billion to support. India has been
gradually transforming its economic base from agrarian to industrial and
commercial. The agricultural sector accounts for 25 percent of GDP, the
industrial sector 34 percent, and services sector 51 percent. India's economic performance over the
past several decades is generally thought to have lagged that of China, its northern neighbor. However, a
close look at what India has accomplished over the past
decade when it began to seriously pursue economic reform suggests that it has
also made dramatic progress. What is especially remarkable is that India has made such great economic
progress under a democratic governmental structure that protects the individual
freedom of its citizens. Such a task is pretty unusual in recent times,
especially in the Asian region, where rapid economic progress has often been
the precursor to political reform and liberalization.
For many years after independence, Indian economic policy emphasized central
planning, with the government setting goals for, and closely regulating,
private industry. In the late 1970s, the government began to reduce state
control of the economy, but made very slow progress toward this goal. By 1991,
the government still ran many of the major industries and maintained most of
the infamous 'government permit raj' that required government permission for
many routine business decisions. During the Persian Gulf conflict in 1991, India faced a financial crisis because of rising oil prices, which stimulated
economic reforms and liberalization. These reforms removed most of the
government regulations on investment, including many on foreign investment, and
eliminated the quota and tariff system that had kept trade at low levels.
Reforms also de-regulated a number of industries and privatized many public
enterprises. Apparently, the reforms were good for the economy; GDP grew at an
average of more than six percent through the year 2000. The economy even
weathered the Asian financial crisis in 1997-8 with only a slight depreciation
of the rupee and a bit less foreign direct investment. Perhaps the major reason
for India's avoidance of the contagion that
swept through Southeast
Asia during the crisis
is that it never opened its economy to free movement of international capital
or made the rupee fully convertible. The recognition that its institutions were
not fully ready for the rigors of internationally mobile capital was, in
retrospect, a great blessing. Private investment has been the fuel for India's recent economic success; domestic
savings and investment now run at about 22 percent of GDP. While foreign direct
investment reached a record high of US$3.6 billion in 1997, 20 times higher
than it was before the reforms in 1991, inflows of direct and portfolio
investment from abroad are miniscule as compared to those received by China. India has more work to do to become a truly attractive
destination for foreign investment.
An earthquake on Jan.
26, 2001, in Gujarat state collapsed villages, homes and
high rises and killed an estimated 30,000 people. Tens of thousands more were
injured and hundreds of thousands left homeless. The government estimated
damage at more than US$4.2 billion, equivalent to well over one percent of GDP.
And, the impact of the dramatic global slowdown in IT-related investment hit India's software/technology sectora
major exporter to just those markets most affected by the IT investment
depression. Agricultural output growth was also very low in 2001. Yet, the
economy still managed to grow five percent on the strength of consumption and
domestic investment demand.
The BJP-led coalition government is not in a strong position to push the
further reforms the economy needs to avoid a further slowdown in growth. Fiscal
policy cannot be used to stimulate growth because the budget deficit is already
too high. Real progress needs to be made in getting real interest rates lower,
de-regulating agriculture, getting reasonably-priced and reliable electricity
service more widely established and eliminating restrictive, outmoded labor
practices. An outbreak of domestic violence between Hindus and Muslims in early
2002 is a most unfortunate distraction for the nation's political leaders from
urgent reform business.
India's GDP grew five percent in 2001, down from the very robust rates of growth of 2000 and 1999, 6.7 percent and 6.4 percent respectively. Agricultural output growth was very low and the industrial sector slowed considerably too, like its counterparts in much of the industrialized world, as global recession reduced trade flows worldwide. The inflation rate declined to about five percent in 2001 from nearly six percent in 2000 and almost seven percent in 1999. The fiscal deficit swelled to about 5.7 percent of GDP for the fiscal year ending in 2001 and the coalition government continues to struggle with ways to achieve better fiscal balance.
World Bank Data
|
|
1999 |
2000 |
2001 |
|
402.6 billion |
454.8 billion |
474.3 billion |
|
|
420.0 |
450.0 |
460.0 |
|
|
409.7 billion |
457.0 billion |
477.6 billion |
|
|
4.4 |
3.9 |
4.5 |
|
|
7.0 |
4.1 |
6.0 |
|
|
28.0 |
24.9 |
24.5 |
|
|
27.1 |
26.9 |
27.1 |
|
|
44.9 |
48.2 |
48.4 |
|
|
11.0 |
14.0 |
13.6 |
|
|
14.5 |
16.6 |
16.5 |
|
|
22.9 |
24.0 |
24.2 |
|
|
12.1 |
13.0 |
.. |
|
|
-4.9 |
-5.4 |
.. |
India's balance of payments has been characterized by modest current account deficits and financial account surpluses sufficient to finance the current account and allow the country to more than double its international reserves to more than US$44 billion as of year-end 2001. But, what is quite striking about India's trade and especially its financial flows is how small they are relative to the size of the economy: India's GDP measured in US dollars is ranked 12th among the world's nations but its exports plus imports rank 29th. The volume of financial flows into and out of India is also small in relation to the size of the economy. For example, India has never received more than US$3.6 billion in direct investment from abroad while both Brazil (whose GDP is about the same size as India's) and China have attracted in excess of US$30 billion per year in recent years. Clearly, India's large population and strong democratic institutions give it outstanding potential for development, but that process will be greatly expedited if it can make itself as attractive to outside investment as other large developing nations.
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Balance
of Payments |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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|
|
1997 |
2000 |
2001 |
|
18.7 |
20.3 |
.. |
|
|
.. |
.. |
.. |
|
|
4.8 |
.. |
.. |
|
|
106.0 |
.. |
.. |
|
|
Foreign direct investment, net inflows in reporting country (current US$) |
3.6 billion |
2.3 billion |
.. |
|
0.0 |
0.0 |
.. |
|
|
21.6 |
12.5 |
.. |
|
|
5.0 billion |
3.5 billion |
.. |
|
|
1.7 |
1.5 |
.. |
|
Exports: |
$44.5 billion f.o.b. (2001) |
|
Exports - commodities: |
Textile goods, gems and jewelry, engineering goods, chemicals, leather manufactures |
|
Exports - partners: |
US 20.9%, UK 5.2%, Germany 4.3%, Japan 4.0%, Benelux 3.3% (2000) |
|
Imports: |
$53.8 billion f.o.b. (2001) |
|
Imports - commodities: |
Crude oil, machinery, gems, fertilizer, chemicals |
|
Imports - partners: |
UK 6.3%, US 6.0%, Belgium 5.7%, Japan 3.5%, Germany 3.5% (2000) |
By the end
of the 1990s, India's market had 5,863 listed
companies, the Calcutta Stock Exchange Association had 3200 listed companies,
the Delhi Stock Exchange ended with 3880 listed companies, the Madras Stock
Exchange had 1750 listed companies, and the National Stock Exchange, in Mumbai,
had 1268 listed companies.
The indices of the Mumbai Stock Exchange are the BSE Sensex 30, the BSE 100,
the BSE 200, and the Dollex.
Foreign investors wishing to invest in the market are required to register with
the Securities and Exchange Board of India. Foreign investment in listed stocks
is limited to 24 percent.
The Over- the- Counter Exchange of India, incorporated in 1990, is the
country's first electronic exchange, and is primarily geared toward small- and
medium-sized companies with post-issue, paid-up capital of less than $70
million. At the end of 1990s the OTC had 115 listed companies The OTCEI is
located in Mumbai.
For more information on the stock exchanges of India, see URLs:
The National Stock Exchange of India:
http://www.nseindia.com/
The Calcutta Stock Exchange Association:
http://www.cse-india.com/
The Madras Stock Exchange:
http://www.mseltd.com/
The Over- the- Counter Exchange of India:
http://www.otcei.net/
Until the 1990s India had a
tightly controlled economy that allowed little foreign investments. From July 1991
industrial and investment policies have become progressively simpler, more
liberal, and more transparent. Nonetheless, even today, foreign investment
remains relatively controlled with equity limits for investors in many sectors
and approval required for many types of foreign investment. In some of these
sectors limits can be exceeded on a case-by-case basis. Sector details on
investment norms follow later.
The current policy has automatic approval for foreign equity investment in many
sectors. Investments in some sectors require approval by either the Foreign
Investment Promotion Board (FIPB) or the Cabinet Committee on Foreign
Investment. These bodies have discretionary powers and the approval process is
not always routine or transparent. The rules vary from industry to industry and
are frequently changed, usually to become more liberal. In the majority of
cases foreign investment does not get national treatment.
1. Expropriation and Compensation
Since the wave of nationalization and expropriation in the early 1970s, there
have been few instances of direct expropriation in India. The
current trend favors government dis-investment of existing publicly owned
enterprises. In the past, compensation and due process meeting international
standards were observed in all cases.
2. Dispute Settlement
At present, there are no Indo-American investment disputes over expropriation
or nationalization. Indian courts provide adequate safeguards for the
enforcement of property and contractual rights, but case backlogs frequently
lead to long procedural delays. India is not a member of the International
Center for the Settlement of Investment Disputes, but is a member of the New
York Convention of 1958. In February 1996, a new arbitration law came into
effect providing for quick arbitration. Companies have now begun to take cases
to the Arbitration Council of India rather than through the slow judiciary
process.
The Arbitration and Conciliation Act of 1996 is based on the UNCITRAL (United
Nations Commission on International Trade Law) Model Law. The act attempts to
unify the adjudication process on commercial contracts in India with
the rest of the world. It is a major step in the ongoing process of
liberalization.
3. Performance Requirements and Incentives
The current investment policy does not require local sourcing. In some consumer
goods industries (e.g., automobiles), however, the GOI requires a memorandum of
understanding (MOU) with the foreign party to insure net inflow of foreign
exchange and foreign equity must cover the foreign exchange requirement for
imported capital equipment. Foreign investment under the Reserve Bank of India's
(RBI) automatic approval process does not require foreign equity to cover
foreign ex-change requirements for import of capital goods in other sectors. On
June 12, 2000, the GOI waived the dividend balancing condition,
which required 22 industries to match export earnings to dividend remittances.
Requirements to gradually reduce foreign equity and transfer technology have
been dropped for most sectors.
Specific rules apply to all foreign automobile-manufacturing investments in
India:
joint venture companies importing unassembled kits and automotive components
must sign a standardized MOU with the GOI requiring US$50 million minimum equity
investment in joint ventures with majority foreign ownership; a local content
requirement;
export obligations;
foreign exchange balancing.
This policy may violate India's WTO Trade-Related Investment Measures (TRIMS)
Agreement commitments on national treatment and the elimination of quantitative
restrictions.
India has a liberal plant location policy. State environmental regulations
and local government zoning policies may affect plant location and sometimes
are a source of delay. There is no requirement to employ Indian nationals and
restrictions on employing foreign technicians and managers have been
eliminated; though companies complain that hiring and compensating expatriates
is time-consuming and expensive. The RBI has raised the remittable per-diem
rate from US$500 to US$1000, with an annual ceiling of US$200,000 for services
provided by foreign workers payable to a foreign firm. Employment in excess of
12 months requires clearance by the Ministry of Home Affairs.
The government in May 2000 announced a 10-year tax holiday for knowledge-based
industries like pharmaceutical and biotechnology to enhance their research and
development activities. Most state governments offer fiscal concessions to
attract investment, particularly in infrastructure.
4. Private Ownership Rights
Foreign and domestic private entities can establish and own business
enterprises, but there are various restrictions that apply to some industry
sectors including government monopolies, small-scale sector reservations, and
limits on foreign ownership. The lack of bankruptcy laws and the requirement
for government permission to close businesses often make it difficult to
dispose company assets. The Indian government's policy does not permit
investment in housing/real estate by foreign investors, except for company
property used to do business. Non Resident Indians, OCB's, or persons of Indian
origin (PIO's) are permitted 100 percent equity investment in real estate.
5. Protection of Property Rights
The legal system puts a number of restrictions on the transfer of land, making
the titles sometime unclear, and often making it difficult to buy and sell
land. There is no reliable system for recording secured interest in property,
making it difficult to use immovable property as collateral or of foreclosing
on property to cover secured debts.
Indian law offers rigorous protection for copyrighted material. The Indian
Copyright Act of 1957 is based on the Berne Convention on Copyrights, to which India is a
party. May 1995 and December 1999 amendments increased protection and
introduced stiff mandatory penalties for copyright infringement. Indian
copyright law is now on par with the most modern law in the world. India is a
party to the Geneva Convention for the Protection of Rights of Producers of
Phonograms and the Universal Copyright Convention, and a member of the World
Intellectual Property Organization and UNESCO. Trademark protection is good and
was raised to international standards with the passage of a new Trademark Bill
in December 1999 that codified the use and protection of foreign trademarks,
including service marks. Enforcement of intellectual property rights has been
weak, but the situation is improving steadily as the courts and police respond
to domestic concerns about the high cost of piracy to Indian rights holders.
Indian patent protection is weak. Indian patent law prohibits product patents
for any invention intended for use, or capable of being used, as a food,
medicine or drug, or relating to substances prepared or produced by chemical
processes. Processes for making such products can be patented, but the patent
term is limited to the shorter of five years from the grant of patent or seven
years from the filing date of the patent application. Product patents in other
areas are granted for 14 years from the date of filing.
As a signatory to the Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS), India must introduce a comprehensive system of product
patents no later than 2005. Patent legislation to meet India's TRIPs
obligations was introduced and passed in March 1999. India has so
far failed to meet the Jan. 1, 2000 deadline for a second set of TRIPS obligations
including further amendments to its Patents Bill. A joint Parliamentary Committee
is reviewing the Patents Amendment Bill, introduced in Parliament in December
1999. Passage of the Bill is expected in late 2000. India has
joined the Paris Convention and the Patent Cooperation Treaty in December 1998.
Aside from its immediate obligations, the Indian government intends to use the
full transition period permitted to developing countries under TRIPS, before
implementing full patent protection. A small, but growing domestic
constituency, made up of some Indian pharmaceutical companies, technology
firms, and educational/research institutions, favors an improved patent regime,
including full product patent protection.
6. Transparency of Regulatory System
India has adequate laws and regulations governing commercial transactions.
Central and state governments regulate the prices of "essential"
products, including food grains, sugar, edible oils, basic medicines, energy,
fertilizers, water and many industrial inputs. Many basic food products are
under a dual pricing system-at fixed prices through government distribution
outlets, at market prices on the open market. The Indian government is revising
the 1956 Companies Act, which governs competition laws and commercial
practices.
The Indian Parliament in May 2000 passed the Information Technology Bill, 2000
to provide the legal framework for India's growing e-commerce sector. This legislation covers
digital signatures, electronic records, service obligations, and penalties for
hacking and introducing computer viruses.
7. Political Violence
There have been few incidents of politically motivated attacks on foreign
projects or installations. Where attacks have occurred, state and federal
governments have responded swiftly. There are violent separatist movements in Kashmir and
some northeastern states. Relations between India and Pakistan are
strained. The Indian government has been able to maintain law and order in all
but a few isolated areas.
8. Corruption and Crime
Corruption remains one of the largest hurdles that foreign investors face doing
business in India. The government procurement system has been
particularly subjected to allegations of corruption in the telecommunications
and power sectors.
India has several laws and regulations that address corruption. The main ones
are the Prevention of Corruption Act, 1988; The Code of Criminal Procedures,
1973; The Companies Act, 1956; and The Indian Contract Act, 1872. Giving or
accepting a bribe is considered a criminal act under the Prevention of
Corruption Act. A bribe to a foreign official is also considered a criminal
act.
The GOI has not amended its anti-corruption laws since 1988, but has initiated
steps to revise the Companies Act of 1956 and has proposed changes in the
Prevention of Corruption Act, 1988. The new changes propose to give more powers
to vigilance departments in government bodies and to make the Central Vigilance
Commission (CVC) a statutory body. The judiciary has taken the lead in
combating corruption in India. A number of bureaucrats and politicians have been
indicted or convicted under anti-corruption laws; however, no investors have
been convicted.
9. Labor
India has the world's third-largest pool of scientific and technical
personnel, which serves as an important attraction for foreign investors. Most
managers and technicians, and many skilled workers, speak English, and many
have studied or worked abroad. Unemployment and underemployment are high,
providing an abundant supply of potential employees. Although there is a large
pool of underemployed, educated personnel, illiteracy acts as a brake on labor
productivity in the work force as a whole.
India is a member of the International Labor Organization (ILO) and adheres
to 37 ILO conventions that protect workers' rights. Industrial relations are
governed by the Industrial Disputes Act of 1947. Workers may form or join
unions of their choice. The Factories Act regulates working conditions. Other
laws regulate employment of women and children and prohibit bonded labor.
Although unionized workers number more than seven million, unions represent
less than one fourth of the workers in the organized sector, primarily in
state-owned concerns, and less than two percent of the total work force. Where
workers are unionized, wage increases are negotiated between unions and
management. Most unions are linked to political parties and their
politicization can create problems for domestic and foreign employers. Labor
militancy has declined in recent years, however, with worker-days lost to
strikes and lockouts declining every year since 1991.
Payment of wages is governed by the Payment of Wages Act, 1936 and the Minimum
Wages Act, 1948. Industrial wages range from about US$3 per day for unskilled
workers, to over US$150 per month for skilled production workers. Retrenchment,
closure and layoffs are governed by the Industrial Disputes Act, which requires
prior government permission to layoff workers or close a businesses employing
100 or more workers. Permission is not easily obtained. Private firms have
successfully downsized using voluntary retirement schemes. Concerns about
capital displacing labor have led to limits on capital investment in some
sectors.
10. International Investment Agreements
The GOI places great importance on bilateral investment agreements and has
signed bilateral investment treaties (BIT) with many countries, including the United Kingdom,
France, Germany and Malaysia. Negotiations on investment protection agreements
are underway with other countries.
11. Foreign Trade Zones
Foreign investment up to 100 percent is permitted in units set up in Export
Processing Zones (EPZ's), Software Technology Parks (STP's), Electronic
Hardware Technology Parks (EHTP's), and to 100 percent Export Oriented Units (EOU's).
New industrial undertakings set up in Free Trade Zones (FTZ's) are entitled,
subject to various conditions, exemption from income tax on business income.
Income of new industrial undertakings set up in FTZ's and newly established 100
percent EOU's are exempt from income tax for a period of 10 years. This
exemption has been restricted to units set up prior to March 31, 2000.
Such units are allowed to make a specified percentage of their sales in the
domestic tariff area. While it lasts, the tax holiday in FTZ's replaces all
other income tax incentives available to industrial undertakings.
Approval for investment in EPZ's and FTZ's can be obtained from The Ministry of
Industry and the Development Commissioners of Export Processing Zones and Free
Trade Zones. EPZ's are currently set up in seven designated areas in India: Kandla
FTZ, Santa Cruz Electronics EPZ, NOIDA EPZ, Cochin EPZ, Falta EPZ, Vishakapatnam
EPZ and Chennai EPZ. The EXIM Policy allows conver-sion of EPZ's to FTZ's
starting from July 1, 1999. The rationale for the FTZ scheme envisages no
interference by customs authorities in order to get the best from exporters
when left without any bureaucratic interference.
12. Foreign Investment Statistics
Foreign Direct Investment (FDI) approvals have risen sharply since the
introduction of reforms in July 1991. Over US$6.7 billion in FDI was approved
in 1999, down 14 percent from the previous year. The U.S.
continues to be a major source of foreign direct investment in India,
accounting for 12.6 percent of investments approved Estimated actual inflows of
US$4,016 million in 1999 accounted for about 59 percent of total FDI approvals.
The
corporate tax rate for foreign companies was reduced from 55 percent to 48
percent and the rate for domestic companies from 40 to 35 percent in fiscal year
1997/98. Final tax incidence may be different if investors take advantage of
bilateral double taxation treaties, which India has signed with 40 countries, including the United States, the United Kingdom, Japan, Germany and France. The long-term capital gains rate
of 20 percent is the same for domestic and foreign companies. The Indian Income
Tax Act exempts export earnings from corporate income tax for both Indian and
foreign firms.
Industrial enterprises in under-developed regions or in infrastructure or
research development activities are eligible for a 10-year tax holiday (100
percent for the first five years and 30 percent for the following five).
Significant tax holidays are also available for new enterprises in
manufacturing, export, free-trade zones, and publishing. Resident companies
involved in several activities, especially export, are automatically qualified
for exemptions.
A number of recent policy changes have promoted foreign direct investment
(FDI). The government has reduced exchange control regulations for companies
with significant foreign participation. The 10 percent tax rate on long-term
(12 months or more) and the 30 percent tax rate on short-term (less than 12
months) capital gains are the same for both Indian and foreign firms and
investors. Dividends and interest income are taxed at a rate of 20 percent. A
five-year tax holiday is available to enterprises developing infrastructure
facilities. Global Depository Receipt (GDR) and American Depository Receipt
(ADR) guidelines now allow unlisted companies to float euro issues. End use
restrictions on GDR/ADR proceeds have been removed, except on investment in
stock markets and
real estate.
The Indian government further liberalized consumer goods imports by removing
half of remaining quantitative restrictions. India has used the harmonized system of commodity classification
since October 1995. Service exports are treated on par with merchandise
exports. The peak basic custom tariff was reduced to 35 percent in the 2000-01 budget.
However, a surcharge of 10 percent of basic duty continued across the board on
all items. The special additional duty (SAD) imposed in 1998, remains in
effect. Budget 2000-01 reduced multiple custom duty rates to six rates.
Export Processing Zones (EPZ's) are designed to provide internationally
competitive infrastructure facilities and a duty-free, low-cost environment for
exporters. Foreign investors in some industries can operate in EPZ's, Export
Oriented Units (EOU's), Special Economic Zones (SEZ's) and soft-ware and
hardware technology parks. India has
eight EPZ's. Units in these zones may be 100 percent foreign-owned or joint
ventures with majority foreign equity holding. 100 percent export oriented
units (EOUs) may be established outside the zones with government approval.
Incentives granted to units set up in the EPZ's are available to EOU's. The
export-import policy allows:
export firms duty-free import of all goods, including capital goods;
a five-to-ten-year income tax holiday;
exemption of excise tax on capital goods, components and raw materials;
exemption of sales tax at the federal/state level;
permission to sell 50 percent of output (by value), as well as up to five
percent of "seconds" on the domestic market against payment of
appropriate taxes.
The Government of India requires a minimum value-addition of 20 percent for
most products. There is no need to obtain an industrial license to manufacture
small-scale industry (SSI) reserved items. EOU/EPZ/SEZ units are obligated to
export 66 percent of their production. The new export-import policy announced
on April 1, 2000 allows EPZ's, EOU's, SEZ's and
Software Technology Parks (STP's) to import or obtain goods from the domestic
tariff area for exports. The policy authorizes new SEZ's and the conversion of
existing EPZ's to SEZ's. The SEZ's would be regarded as foreign territory for
the purpose of duties and taxes to retain their entire foreign exchange
earnings as opposed to 70 percent earlier. No sector caps that presently limit
FDI in different industries will be applicable to units in SEZ's.
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India's amazing diversity offers you
everything you could ever want in a holiday. From the moment that you set
foot in India to be greeted by a graceful namaste, a gesture that denotes
both welcome and respect, you are on the way to one of the most rewarding
experiences of your life. |
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Sources: Country Watch, Central Intelligence Agency: http://www.cia.gov
International Monetary Fund: http://www.imf.org
World Bank: http://www.worldbank.org
Tourism: http://www.tourisminindia.com/zones/index.htm