The introduction of economic reforms and liberalisation
in 1991 led to an explosion of foreign investments
in India. In attempting to attract foreign investments,
the government of India points out that India has
the benefits of one of the largest economies of the
world:
-
Is strategically located
for manufacture and export to West, South
and Southeast Asian markets;
-
Has a rapidly growing
consumer market of about 300 million people
capable of buying brand consumer products;
-
Has highly skilled manpower
and professional managers available at competitive
costs;
-
Provides special incentives
for export activities and a package of fiscal
incentives for domestic manufacture and
marketing;
-
A sophisticated financial
sector and a capital market with over 9,000
listed companies; and a long history of
stable parliamentary democracy.
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Compared to past socialist and bureaucratic
obstacles to foreign investments, the reforms have
made India's business environment "investor
friendly". With most regulatory restrictions
removed, state governments are now competing with
each other for foreign investments by offering the
easiest and fastest access to their economies.
In September 1992, the government announced a scheme
for portfolio investment by Foreign Institutional
Investors (FII) such as Pension Funds, Mutual Funds,
Investment Trusts, Asset Management Companies, Nominee
Companies and Incorporated/Institutional Portfolio
Managers to invest in all the securities traded on
the primary and secondary markets. As well as in Government
securities. The FIIs need to register with the Securities
and Exchange Board of India (SEBI). There are no restrictions
on the volume of investment nor are there any "lock-in"
periods. The net FII investment in India as of May
1999 amounted to US$9.265 billion.
Among
the many multinational corporations that now operate
in India are Alcatel, AT&T, Enron, Fujitsu, General
Electric, Siemens and British Telecom (all in infrastructure);
3M, Cummins, Daewoo, Daimler-Benz, Du Pont, Ford, General
Motors, Hewlett Packard, Honda, IBM, Mobil and Royal
Shell (in industry and engineering); Canon, Hitachi,
Philips, Samsung, Sony, Whirlpool, Xerox and Braun (in
consumer durables); Ciba-Geigy, Coca-Cola, Eli Lilly,
Kellogs, Nestle, Pepsico, Proctor & Gamble, RJ Reynolds
and Unilever (in consumer non-durables); and American
Express, Arthur Andersen, Citicorp, J P Morgan, Merrill
Lynch, Microsoft and Morgan Stanley (in services).
The
liberalised foreign investment policy in India includes
automatic approval for foreign equity participation
of up to 51 per cent in several key areas; foreign equity
up to 100 per cent in several sectors; free repatriation
of profits and capital investment with exceptions in
some cases; the use of foreign brand names and trade
marks for sale of goods in India; avoidance of double
taxation; and special investment and tax incentives
for export oriented industries and in other sectors
such as power, electronics, software and food processing.
Foreign
investors may invest in virtually every sector of the
economy and do not necessarily require Indian partners.
No industrial license is required except for some specified
industries of strategic, social or environments concern,
and those reserved for small scale industries. The use
of foreign trademarks and brand names are allowed. Tariffs
were lowered from a peak of 350 per cent in June 1991
to 50 per cent with the prospect that this will decline
further. Capital goods imports are charged a flat 25
per cent duty. Income and corporate taxes have been
substantially reduced, and filing procedures have been
simplified, as part of India's economic reforms.
At the end of 1999, the government of India introduced
automatic approval for foreign direct investments (FDIS),
except in electronics, aerospace and defence industries,
industrial explosives, hazardous chemicals, drugs and
pharmaceuticals, the distillation and brewing of alcohol,
and cigars and cigarettes.
One of India's main advertising points for prospective
foreign investors is that India consumer middle class
may be about 5 per cent of the population or a 50 million
consumer market for goods such as cars, refrigerators,
and electronic goods, and perhaps 30 per cent or 300
million consumers for basic items such as processed
foods, clothing and toiletries, even if half the population
may still live under the poverty line. And as rapid
industrialisation proceeds more Indians will join this
expanding middle class.
However, the bulk of this consumer middle class market
covers essentials such processed foods, toiletries,
paper products and other basic household items. Purchasing
power at higher levels is quite limited compared to
countries such as Taiwan and Indonesia whose populations
are far less (20 million and 200 million, respectively).
As Jaithirth Rao, the chairman of the Citicorp Development
Center in the US, pointed out, only 320,000 automobiles
were sold in India in 1996 compared to 480,000 in Taiwan
and 275,000 in Indonesia. Indian consumers carried only
1.8 million credit cards in 1996 compared to 5 million
in Taiwan.
The example of annual sales of automobiles may be somewhat
misleading since under the earlier controlled Indian
socialist system before 1991, production of cars were
limited with demand exceeding supply several fold. There
were controls on developing new models of cars, and
the waiting period for the delivery of a car once purchased
was at one time as much as seven years. Since liberalisation,
Ford, General Motors, Honda, Hyundai and Daewoo (which
has since gone into bankruptcy) have entered various
sectors of the automotive production industry. Until
now, Suzuki was the main foreign collaborator in the
manufacture of cars.
Since 1993, the sales of cars in India have been growing
at 25 per cent with a high of 33 per cent during 1995-96.
As regards consumer credit, international credit card
companies are just entering the Indian market as the
Rupee moves towards convertibility as a hard currency
in the international market. India's insurance market
has also opened up, attracting significant overseas
interest and investment.
Investment
problems
Foreign investors may still find some problems in
dealing with the Indian governmental bureaucracy.
It still remains large and old habits die slowly.
However, under new orders from the governments in
power, there has been a monumental change in the rate
of approvals for investments and the time taken to
do so. There has been more than a ten-fold increase
in the quantity of approvals and the time taken for
decisions have been reduced from years to a few weeks.
With various bureaucratic checks and obstacles at
various stages of decision-making removed, opportunities
for graft have also been removed although it is difficult
to say to what extent. However, with more intense
private sector competition, and the promise of large
rewards for successful investments, there may be increased
problems of graft and corruption of a different kind
involving the private sector rather than the public
sector.
But with the judiciary now making
it clear that even high ranking ministers including
prime ministers (Narasimha Rao), the chief ministers
of states (Bihar and Tamil Nadu), and other high ranking
politicians are not beyond the law for bribery and corruption,
restraint is likely. Some concerns about foreign investor
confidence were raised following allegations of graft
and corruption against the American firm, Cogentrix,
and the Indian firm, China Light and Power, in the setting
up of the US$1.3 billion Mangalore Power Company. The
project was given techno-economic clearance by the Central
Electricity Authority in July 1996 and a power purchase
agreement was executed between Mangalore Power Company
and
Karnataka Power Transmission Corporation in November 1997.
Following the delays, allegations, and heavy expenses
in public interest litigation, Cogentrix withdrew its
partnership and investment in India on 9 December 1999.
US ambassador Richard Celeste pointed out that the Cogentrix
case sent 'damaging signals' to potential American investors
in India.
The day after Cogentrix announced its withdrawal, the
Supreme Court cleared the companies of all kickbacks.
Responding to concerns expressed in the Indian Parliament
about foreign investor confidence arising from this
case, Power Minister R Kumaramangalam declared that
the Government would go ahead in providing counter-guarantees
Cogentrix on the lines of those provided to other foreign
fast track projects in the country approved by the government.
Foreign investors continue to be wary of major projects,
in particular energy projects, following the debacle
of Enron's investment in Maharastra. (Enron, prior to
its own collapse, invested in a major power generation
project in Maharastra, but the terms were later adjusted
to make it uneconomic to continue.) Much FDI remains
dispersed, or invested in Indian stocks.
Chinese
investment
In May 2001, a delegation of officials from Guangzhou
province visited Mumbai. The 200 strong delegation
were met by members of Mumbai's business community
who were seeking to exploit investment opportunities
in China, notably it's low-cost manufacturing ability.
Bajaj Autos, Tata Consultancy Services and Infosys
were mooted as possible investment partners. Pharmaceutical
firms Ranbaxy and Aurobindo have already established
manufacturing facilities in Guangzhou and Shanxi respectively.
In 2000, Indian imports constituted US$1.35 billion
of China's total annual imports of $230 billion. Tie-ups
with China offer major benefits for Indian companies.
In addition to low cost outsourcing, investment decisions
are taken at the state level and can therefore be
processed a lot quicker.
International
Investment Position: External Assets and Liabilities
at End of March 2003
Assets
| (Rs.
crore) |
| |
2001
PR |
2002
PR |
2003
P |
| International
Investment Position, net |
-355174.08 |
-335849.94 |
-285952.25 |
| Assets |
291378.88 |
359398.14 |
449846.32 |
| Direct
Investment Abroad |
12,197.99 |
19,547.39 |
24,031.08 |
| Equity
Capital and Reinvested Earnings |
11,853.56 |
18,595.24 |
22,600.52 |
| Liabilities
to Affiliated Enterprises (-) |
|
| Other
Capital |
344.43 |
952.15 |
1430.56 |
| Liabilities
to Affiliated Enterprises (-) |
|
| Portfolio
Investment |
2353.27 |
3270.10 |
3429.88 |
| Equity
Securities |
1,259.27 |
1,736.27 |
1,835.07 |
| Banks |
372.00 |
470.00 |
433.00 |
| Other
Sectors $ |
887.27 |
1,266.27 |
1,402.07 |
| Debt
Securities |
1094.00 |
1533.83 |
1594.81 |
| Bonds
and Notes |
1094.00 |
1533.83 |
1594.81 |
| Banks |
342.00 |
567.00 |
637.00 |
| Other
Sectors $ |
487.00 |
581.83 |
567.81 |
| Money-market
Instruments |
265.00 |
385.00 |
390.00 |
| Banks |
265.00 |
385.00 |
390.00 |
| Other
Investment |
76750.80 |
69570.35 |
60912.32 |
| Trade
Credits |
4301.96 |
3672.66 |
5214.36 |
| Loans |
9302.13 |
10756.71 |
6731.37 |
| General
Government |
1562.00 |
1797.00 |
2535.00 |
| Long-term |
1562.00 |
1797.00 |
2535.00 |
Liabilities
| (Rs.
crore) |
| |
2001
PR |
2002
PR |
2003
P |
| Liabilities |
646552.96 |
695248.08 |
735798.57 |
| Direct
Investment in Reporting economy |
94798.60 |
123990.60 |
146565.60 |
| Equity
Capital and Reinvested Earnings $$ |
88521.60 |
115889.60 |
136230.60 |
| Liabilities
to Direct Investors |
88521.60 |
115889.60 |
136230.60 |
| Other
Capital |
6277.00 |
8101.00 |
10335.00 |
| Liabilities
to Direct Investors $$$ |
6277.00 |
8101.00 |
10335.00 |
| Portfolio
Investment |
145961.13 |
153916.17 |
152799.60 |
| Equity
Securities |
81217.00 |
90834.00 |
95513.00 |
| Banks
@@ |
0.00 |
0.00 |
0.00 |
| Other
Sectors $$ |
81217.00 |
90834.00 |
95513.00 |
| Debt
securities |
64744.13 |
63082.17 |
57286.60 |
| Bonds
and notes |
64744.13 |
63082.17 |
57286.60 |
| General
Government |
876.13 |
824.17 |
881.60 |
| Banks
# |
48635.13 |
48588.69 |
47693.07 |
| Other
Sectors ## |
15232.87 |
13669.31 |
8711.93 |
| Money-market
Instruments |
0.00 |
0.00 |
0.00 |
| Other
Investment |
405793.23 |
417341.31 |
436433.37 |
| Trade
Credits |
22745.00 |
18635.00 |
22559.00 |
| General
Government |
60.00 |
0.00 |
0.00 |
| Other
Sectors |
22685.00 |
18635.00 |
22559.00 |
| Long-term |
10229.00 |
9963.00 |
10175.00 |
| Short-term* |
12456.00 |
8672.00 |
12384.00 |
| Loans |
298470.13 |
306093.10 |
290017.61 |
| Monetary
Authorities |
0.00 |
0.00 |
0.00 |
| Use
of Fund Credit & loans from the fund |
0.00 |
0.00 |
0.00 |
| General
Government |
202033.00 |
209169.00 |
202841.00 |
|
