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Economic Analysis: India

Economic Analysis: India. Dr. Rana Singh Associate Professor www.ranasingh.org. India – Land of Opportunities. Fourth largest Economy (PPP) - A safe place to do business. Largest democracy – political stability & consensus on reforms. Largest reservoir of skilled/semi-skilled manpower.

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Economic Analysis: India

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  1. Economic Analysis: India Dr. Rana Singh Associate Professor www.ranasingh.org

  2. India – Land of Opportunities Fourth largest Economy (PPP) -A safe place to do business Largest democracy – political stability & consensus on reforms Largest reservoir of skilled/semi-skilled manpower Liberal & transparent investment policies Long-term sustainable Competitive advantage - High growth rate economy Second Largest Emerging Market

  3. JACK WELCH, GE JOHN CHAMBERS, CISCO MICHAEL DELL, DELL BILL GATES, MICROSOFT 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 R&D 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 Dell’s operations and we are looking to capitalize on India’s human capital”

  4. Indian Economy – An Overview • Economic Growth • Sustained economic performance • Average since 1991 6.2% • 2004-05 6.9% • 2005-06 7.5-8.0 % (estimated) • Forecast till 2050 –Goldman Sachs 5 % p.a. • Services account for over 50% of GDP • Manufacturing sector grew at 9% in 2004-05 • Trade (2004-05) • Exports growth 24% in 2004-05 reaching US$80 billion • Imports growth 35% reaching US$106 billion • Investment • Foreign Investment - US$16 billion in 2003-04 • Mature Capital Markets • NSE third largest, BSE fifth largest in terms of number of trades • Well developed banking system

  5. Economic Reforms • Rationalisation of direct and indirect tax structure • Peak Custom duty: 15% • Corporate Tax: 30% • Tariff to be aligned with ASEAN levels • Policies on outward investments also liberalised • Rupee made fully convertible on trade account • Fiscal Responsibility & Budget Management Act • Revenue deficit to be brought to zero by 2008 5th among the top reformers in 2003: World Bank

  6. Economic Reforms-contours • Industrial Policy Reforms • Industrial delicensing and deregulation • Licensing limited to only 6 sectors: on security, public health & safety considerations • Liberal policy on technology collaboration • Trade Policy Reforms • Most items on Open General License, Quantitative Restrictions lifted • Progressive reduction in customs duty • Imports grew at 34% in 2004-05 to reach US$105 billion • Foreign Trade Policy • To double India’s share in global merchandise trade in 5 years

  7. Not Just Knowledge Based Sectors • Second most attractive destination for manufacturing • AT Kearney FDI Confidence Index 2004 • Indian industry is equally competitive in a wide range of manufacturing activities • Automobile sector: Major MNC’s sourcing high quality components and hardware from India • Volvo, GM, GE, Chrysler, Ford,Toyota, Unilever, Clariant, Cummins, Delphi • Bharat Forge: world’s largest single location forging facility, supplier to Toyota, Honda, Volvo, Cummins, Daimler Chrylser • Hero Honda: world’s largest manufacturer of motorbikes • Moser-baer: world’s third largest producer of optical media and lowest cost manufacturer of CD-Recorders • Tata Steel: World’s lowest cost producer of hot-rolled steel

  8. Skilled Knowledge Workforce • India’s competitive edge - its highly skilled manpower • Over 380 universities (11,200 colleges) • Over 1500 research institutions • Over 2,00,000 engineering graduates • Over 3,00,000 post graduates from non-engineering colleges • Over 21,00,000 other graduates • Around 9,000 Ph. Ds • Knowledge workers in software and service industry increased from 56,000 in 1990-91 to 6,50,000 in 2003; • to reach 2 millions by 2008

  9. Competitiveness Indicators Rank out of 102 countries • Availability of scientist and engineers 3 • Quality of management schools 8 • State of cluster development 17 • Technological sophistication 25 • Sophistication of financial markets 37 • Foreign ownership restrictions41 (Source: WEF’s Global Competitiveness Report, 2003-04)

  10. Competitiveness Indicators-contd.. Rank out of 102 countries • Prevalence of foreign technology licensing6 • Government’s prioritization of ICT 12 • Quality of scientific research institutions20 • Government intervention in corporate investment34 • Quality of educational system 36 • Ease of access to loans 38 (Source: WEF’s Global Competitiveness Report, 2003-04)

  11. Finland United States Sweden Taiwan Denmark Norway Singapore Switzerland Japan Iceland 11 United Kingdom Netherlands Germany Australia Canada Israel Ireland China 55 India Global Competitiveness Rankings SOURCE: World Economic Forum, Global Competitiveness Report 2004-2005

  12. Liberalisation of FDI Policy More sectors opened Equity caps raised Conditions relaxed FEMA enacted Up to 100% Under Automatic Route in all sectors except a small negative list up to 74/51/50% in 111 Sectors Under Automatic Route 100% in some sectors Up to 51% under Automatic Route for 35 Priority Sectors Allowed selectively up to 40% Post 2000 Pre 1991 1991 1997 2000

  13. Investing in India – Entry Routes Investing in India Automatic Route Prior Permission (FIPB) General rule No prior permission required Inform RBI within 30 days of inflow/issue of share By exception Prior Government Approval needed. Decision generally Within 4-6 weeks

  14. Automatic Route • FDI in activities under the Automatic Route DOES NOT require any prior approval; • Investor is ONLY required to inform the RBI after the investment has been made: • With in 30 days of inward remittances, and • Within 30 days of issue of shares to non-residents.

  15. Policy on FDI • FDI up to 100% under ‘Automatic Route’ in all activities except • Sectors attracting compulsory licensing • Equity limits under sectoral policies • Transfer of shares to non-residents under certain circumstances • Investor having existing venture in same field under certain circumstances • National Treatment to investment; • Bilateral Investment Protection Agreement with 57 countries.

  16. Cars and motor vehicles Food processing Electronic Hardware Refrigerator and fire fighting equipments Iron and steel Private Oil Refineries Industrial Machinery Fertilizers Pollution control equipments Tyres and tubes Packaging products Construction Machinery Domestic air conditioners Electric motors, industrial electric furnaces Mining and Quarrying Machinery Steam engines and turbines Non-metallic mineral products Oil mill machinery Chemical machinery Drugs & pharmaceuticals and pesticides except those requiring industrial licensing Medical equipments Manufacturing Sector: 100% FDI under ‘Automatic Route’ FDI up to 100% allowed under ‘automatic route’ in almost all activities Some of these activities are: (illustrative list)

  17. Infrastructure Sectors: 100% FDI Under ‘Automatic Route’ • Electricity generation (except atomic energy) • Electricity transmission • Electricity distribution • Mass Rapid Transport System • Roads and Highways • Toll Roads • Vehicular bridges • Ports and Harbors • Hotel and tourism • Townships, housing, built up infrastructure and construction development

  18. RecentFDI Policy Initiatives • FDI up to 100% allowed under the automatic route in development of townships, housing, built up infrastructure and construction development projects. • FDI in domestic airlines increased. • FDI in Telecom services increased. • Fresh guidelines for investment with previous joint ventures issued. • Transfer of shares from residents shareholders put on automatic route.

  19. Foreign Technology Collaboration Policy • Foreign technology agreements allowed under Automatic route: • Lump sum fees not exceeding US$ 2 Million; • Royalty @ 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.

  20. Exchange Controls & Taxation • All investments can be 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; • Companies incorporated in India treated as Indian companies for taxation; • Double Taxation Avoidance Agreement with 65 countries

  21. India’s Outward Investment Policy • Liberalisation initiated in 1992. Policy progressively liberalized • Indian Corporates allowed to invest overseas up to 100% of net worth. • Increasing overseas investment by Indian Corporates • Over US$3 billion in 2002-03 & 2003-04 • Over 55% of investment in manufacturing • Over 100 major acquisitions by Indian corporates in the last 2 years • Indians among the top 10 investors in UK

  22. India: FDI Outlook • Third most attractive investment destination – AT Kearney Business Confidence Index, 2004 • Up from 6th most attractive destination in 2003 • Among the top 3 investment ‘hot spots’ for the next 4 years • UNCTAD & Corporate Location – April 2004 • Most Preferred Off shoring destination- AT Kearney’s 2004 Offshore Location Attractiveness Index

  23. 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.

  24. Telecommunications • Among the fastest growing telecom markets • 470,000 km of optical fibre cable laid • Cellular phones increasing by over 2 million every month • To reach 200 million in 3-4 years • Broad Band Policy envisages: • 20 million broadband subscribers and • 40 million internet subscribers by 2010. • Tele-density of 9, expected to be 20 in next three years; • Investment Opportunities • Setting up manufacturing base. • Telecom & Value added service

  25. 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 enacted; allows trading in power and further deregulation; • Independent Regulator in most states • Investment Opportunities • Additional capacity required 1,00,000 MW till 2012 • Investment US$120 billion needed; • Financial closure for over 4000 MW capacity achieved in last one year

  26. 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; • Investment Opportunities • India has a road network of 3.3 million kilometers • Highways: 25,000 km of highways under development • Investment US$24 billion envisaged • Many more opportunities in the States; • Different schemes available (BOT Toll based, Annuity, SPV)

  27. 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 Incentives For developer: Income tax exemption or a block of 10 years in 15 years For units: 100% Income Tax exemption for first 5 years, 50% for next 2 years Exemption from indirect taxes; excise, sales, services tax, etc. Freedom to raise ECB with out any maturity restrictions Special Economic Zones New Law on SEZ on the anvil

  28. ICT Advantages • IT Industry US$ 16.5 billion * • Exports US$12 billion, growing at 32%* • 2008 exports target : US$60 billion, to be 35% of India’s total exports • High quality standards • 62 SEI/CMM level 5 companies, i.e. two third of world’s total, are Indian • 250 Fortune 500 companies clients of Indian firms • R&D base of over 100 FORTUNE 500 companies • Investment Opportunities • Collaborative ICT research • Joint Software development in a variety of applications * NASSCOM

  29. Auto Component Industry • Fast Growing Industry • Approx. US$ 8.7 billion industry in 2004-05 • Annual growth rate 30% • US$17billion by 2012 (AT Kearney study) • High degree of export orientation • 60% of exports to US and Europe • Top global vehicle manufacturers/ tier 1 suppliers sourcing components from India: • General Motors, Daimler Chrysler, Volvo, Cummins, Ford, Fiat, Renault, Toyota Motors • Opportunities to leverage on low cost, high-skilled manpower to reduce cost of production

  30. Textiles • Indian textiles sector: • Turnover US$37 billion; • Exports US$13 billion; • Investments of US$11 billion in the last five years; • India is 2nd largest producer of cloth and 3rd largest producer of cotton yarn; • Textiles sector has the potential to reach US$85 billion by 2010 • Exports can reach US$50 billion • Garments to account for 50% of exports; • Investment required US$30 billion

  31. Biotechnology India’s inherent strengths • Rich Biodiversity • Large reservoirs of valuable diagnostic and clinical data • Vibrant and inventive pharmaceutical industry; • World class network of educational and research institutions • Known strengths in mathematics, logic and computational skills • Super Computing and Software strengths enable extensive use of bio-informatics in new drug discovery Opportunities : • Biotech based new drugs / pharmaceuticals • Bio-technology parks get all facilities of 100% EOU

  32. Fiscal Reforms • Rationalisation of tax structure – both direct and indirect • Progressive reduction in peak rates of duties; • Direct and indirect taxes further reduced this year • Peak Custom duty reduced to 15% • Corporate Tax reduced to 30% • Tariff to be aligned with ASEAN levels • Value Added Tax introduced from 1st April 2005 • Rupee made fully convertible on trade account India among the top reformers in 2003: World Bank’s Doing Business in 2005

  33. ‘Made in India’ • Third most attractive destination for manufacturing • ATKearney’s FDI Confidence Index 2004 • Indian industry equally competitive in a wide range of manufacturing skill-intensive products: • Apparels, electrical and electronics components; speciality chemicals; pharmaceuticals; etc. • Automotive components: Major MNC’s & 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 multiple countries • Over 55% of approved outward investment by India companies in manufacturing activities

  34. Human Resources • India’s competitive edge - its highly-skilled manpower • Over 380 universities (11200 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 650,000 in 2003; • to reach 2 million by 2008 • Due to its young demographic profile, India would continue to be surplus in working population for a long-time

  35. Civil Aviation • Investment Policy • In the airports, FDI up to 100% permitted • In domestic airlines, FDI up to 49% permitted subject to no direct or indirect equity participation by foreign airlines • 100% investment by NRIs • Investment Opportunities • Modernisation of International airports at Delhi, Mumbai, Chennai and Kolkata • Modernisation of non -metro airports • Private sector participation is allowed in support services and aircraft manufacture

  36. Civil Aviation Project on Offer Development of Metro and non Metro Air ports

  37. Civil Aviation Airports – Traffic Projections Passenger • By 2010: 90-100 million (59 million domestic passengers & 35 million intl. Passengers) Cargo • By 2010: 3360 thousand tonnes Airports – Traffic Projections

  38. 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 • 12 private/ captive projects with investment of US$ 600 million completed • 24 projects with investment of US$1.6 billion under implementation/award • Investment requirement of US$22 billion to develop maritime sector • Ports & Shipping • Inland waterways

  39. Tourism Investment Policy • FDI up to 100% is allowed under the automatic route in townships, housing, built-up infrastructure and construction development projects including housing, commercial, premises, hotels, resorts, hospitals, educational institutions, recreational facilities etc. Projects on Offer • International Trade cum Convention Centre , Jaipur • Offered to private sector for designing, finance, construct, operate and maintain the facility • Estimated cost Us $ 22 million • Time frame for implementation 18 months • Development of Tijara Fort, Alwar • Private sector would require to restore the Fort and develop interior & surroundings of the fort, would be provided for long term lease • Estimated cost Us $ 5.5 million • Time frame for implementation 18 months • Championship Golf Course, Udaipur, Jodhpur or Jaipur • Land would be acquired and offered on long term lease • Estimated cost Us $ 5.5 million excluding land cost • Time frame for implementation 18 months • International Convention Centre , Bangalore • Karnataka Govt would acquire the land for investors • Facilities to be provided in convention Centre : Exhibition space of 50000 sq Mt, food court, Conference Hall & suites, Convention Centre, shopping malls, health club, golf course, % & 7 star hotels, handicraft village, multiplexes etc. • Estimated cost Us $ 111 million

  40. UrbanInfrastructure FDI Policy • FDI upto 100% is allowed in townships, housing, built-up infrastructure and construction development projects Opportunities • Us$ 26 billion proposed to be invested in next 5 years in urban infrastructure in 60 cities as a part of National Urban Renewal Mission • The Mission covers physical infrastructure such as water, lighting, sanitation, energy & housing. •  CII

  41. Petroleum Refining Status • Total 18 refineries with production of 116 million tonnes (April- Feb. 2004-05) in terms of crude through put. • by the year 2006-07 demand is expected to increase to 155 million tonnes per annum. FDI Policy • FDI is permitted up to 100% under automatic route in private sector Indian companies Investment opportunities • Additional refining capacity of about 110 million tonnes per annum excluding EOUs is planned for implementation by the end of tenth plan( 2002-07) • Investment requirement of over US $ 22 billion. • Opportunity for the transfer of technologies for upgrading the bottom of the barrel and to meet the predominant demand for middle distillates and also to improve the quality of petroleum products to make them environment-friendly and globally competitive.

  42. Banking Sector Status • No of Scheduled Banks: 362( As on March 2003) * • Indian Private Sector Banks: 30 (market share: 10%) • Foreign Banks: 36 (market share: 12%) FDI Policy • FDI up to 74% from all sources under automatic route is permitted in Private Sector Banks subject to conformity of guidelines issued by RBI • Foreign Bank can also establish as branch or Wholly owned subsidiary * Source: Indian bank Association http://www.indianbanksassociation.org/home/

  43. Textiles • Indian textiles sector: • Turnover US$37 billion; • Exports US$13 billion; • Investments of US$11 billion in the last five years; • India is 2nd largest producer of cloth and 3rd largest producer of cotton yarn; • Textiles sector has the potential to reach US$85 billion by 2010 • Exports can reach US$50 billion • Garments to account for 50% of exports; • Investment required US$30 billion

  44. Pharmaceuticals • Indian Pharmaceutical : A US $ 4 billion industry (retail sales) • Exports: US $ 3.18 billion (2003-2004) • The country ranks 4th worldwide accounting for 8% of world’s production by volume and 1.5% by value. Opportunities • Due to rising costs of R&D overseas, greater tendency towards outsourcing and networking. • Increasing competence in molecular biology, immunology and biotechnology • Potential for clinical research and initiating clinical trials • An efficient and cost effective source for procuring generic drugs especially the drugs going off patent in the next few years.

  45. Power Projects on offer • Bairabi dam Hydro Electric project (80mw) –Mizoram • Ministry of environment and forests has granted environment clearance to the project. • CEA has issued techno economic clearance of the project • Athirapilly Hydro Electric project (160 MW) Kerala • Ministry of environment and forests has granted environment clearance to the project. • Techno economic clearance of the project has been accorded • Matnar Hydro Electric Project (60 MW) Chhattisgarh • Environment and forest clearances are yet to be obtained. • Techno economic clearance of the project has be accorded

  46. Power Projects on offer • Private Sector Hydro Electric Projects • Dhamwari Sunda (70 MW) Himachal Pradesh by M/s Dhamwari Power Company Ltd economic clearance of the project has been accorded • Alliain Duhangan (192 MW), Himachal Pradesh , by M/s A.D. Hydro Power Ltd • Karcham Wangtoo (100 MW) Himachal Pradesh by Karcham Hydro Corporation Ltd. • Srinagar (330 MW), Uttaranchal by M/s Alaknanda hydro Power Co. Ltd.

  47. Impact of the Reversing Reforms of 91

  48. 1980s • Efforts towards deregulation and liberalization had started in the 80s • Reforms got jump started by the crises in the middle of 1991 • There were fears that India would default on its international dues • Or else would default for want of critical imports

  49. From crises to reforms • Balance of Payment crises led to the initialization of the 91 reforms • The 91 reforms completely reversed those being pursued until the 80s • Import substitution- Industrialization and self reliance were overthrown by reforms that preached deregulation and liberalization

  50. 1991 reforms • Licences for domestic manufacturing were abolished • Private sector were allowed to enter reserved public sector areas • Import tariffs were reduced drastically • Rupee was devalued

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