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Background India gained independence in 1947 after two centuries of British colonial rule. Partition at the same time created the state of Pakistan, with which India has fought three wars, two over the disputed territory of Kashmir. India is the second most populous country in the world, with nearly 1.1bn people in 2005. Its economy is the 12th-largest in the world measured in nominal US dollars, but rises to fourth-largest when measured at purchasing power parity exchange rates. India: The promise of growth India is today one of the six fastest growing economies of the world. The country ranked fourth in terms of Purchasing Power Parity (PPP) in 2001. The business and regulatory environment is evolving and moving towards constant improvement. A highly talented, skilled and English-speaking human resource base forms its backbone. The Indian economy has transformed into a vibrant, rapidly growing consumer market, comprising over 300 million strong middle class with increasing purchasing power. India provides a large market for consumer goods on the one hand and imports capital goods and technology to modernize its manufacturing base on the other. An abundant and diversified natural resource base, sound economic, industrial and market fundamentals and highly skilled and talented human resources, make India a destination for business and investment opportunities with an assured potential for attractive returns. Far-reaching measures introduced by the government over the past few years to liberalise the Indian market and integrate it with the global economy are widely acknowledged. The tenth five year plan document targets a healthy growth rate of 8% for the Indian economy during the plan period 2002 – 07. Selected Economic Indicators India remained relatively unscathed from the 1997-98 Asian financial sector crisis and has maintained a healthy growth rate of over 5 per cent despite recession in major world economies over the past two years. This demonstrates the size, strength and resilience of the Indian economy. India’s GDP for the year 2001-02 was US$ 422 billion. The real GDP growth varied between 6 to 8 per cent per annum (average 6.5 per cent per annum), during the 1990s. Were it not for the resilience of China and India, the world economy would have been in deep recession in 2002. Source: Morgan Stanley Dean Witter report. The sectoral composition of GDP reflects a transition. While the agricultural and industrial sectors have continued to grow, the services sector has grown at a significantly higher pace - it currently contributes nearly half of India’s GDP. On the external front, cumulative foreign investment inflows have been US$ 50 billion since 1991. This includes over US$ 28 billion of Foreign Direct Investment (FDI) and about US$ 22.6 billion in portfolio investment. Licensing has been removed from all but six sectors. The Indian government is determined to remove any remaining road blocks, real or perceived. India has one of the most transparent and liberal FDI regimes among the emerging developing economies. The Union government has been continuously opening up new sectors to foreign investment, while enhancing FDI limits in others. The year 2002 saw the opening up of the defence, print media, housing and real estate and urban mass transportation sectors. Some of the key aspects of FDI in the country include: • 100 per cent FDI is allowed in most sectors except telecommunications (49 per cent), insurance (26 per cent), banking (49 per cent), aviation (40 per cent) and small scale industries (24 per cent). FDI in excess of 24% is permitted in SSI sector on 50% export obligation. • FDI inflows grew by 65 per cent over the previous year to reach US$ 3.91 billion during 2001-02. The growth of 65 per cent is encouraging at a time when global FDI inflows have declined by 40 per cent. • The upward trend in FDI inflows has been sustained with FDI inflows during April-June 2002 being double that of the corresponding period in 2001. • An Economist Intelligence Unit (EIU) report on ‘World investment prospects 2002’ projects an annual average FDI inflow of US$ 5.3 billion into India during 2002-2006. External sector India’s external sector posted significant gains during 2001-02, despite the deepening of the global slowdown and uncertainties owing to September 11, 2001 terrorist attacks. The current account registered a surplus after a period of more than two decades. The buoyancy in capital flows bolstered the foreign exchange. Indicators of liquidity and sustainability of external debt improved further. The exchange rate of the rupee remained broadly stable during the year. FDI flows to India will go up: UNCTAD ‘’Worldwide FDI flows will decline this year - 25 per cent in developing and 31 per cent in developed countries - but India is one of the few countries where it will go up,’’ Karl Sauvant, Director, UNCTAD told UNI. Source: News reports, 25 November 2002. According to a recent report on global foreign direct investment inflows, India has been rated the seventh most attractive destination in the world for FDI for 2001. Weak external demand adversely affected India’s export performance during 2001-02. This was counterbalanced by the listless domestic demand for imports and the softness in international oil prices for a greater part of the year. As a result, the trade deficit, on balance of payments basis, declined from US$ 14.4 billion during 2000-01 to US$ 12.7 billion during 2001-02. The invisible account continued to provide support to the balance of payments with the surplus increasing from US$ 11.8 billion during 2000-01 to US$ 14.1 billion during 2001-02. The current account recorded a surplus of US$ 1.4 billion. Net capital flows were higher at US$ 9.5 billion during 2001-02. MNCs happy operating in India, 61% in black "…A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors operating in India was satisfactory, with 61 per cent reporting profits or break-even. And around 51 percent of the respondents have expansion plans on the cards. Despite the overall conditions of slowdown, over 71 per cent respondents reported a capacity utilization of 50-75 per cent. As many as 93 per cent of the respondents find the handling of approvals and applications at the Centre to be good to average. The simplification of the approval procedure at the Centre can be gauged by the fact that the number of applications going through the automatic route has risen from 16 per cent in 2000 to 29 per cent in 2001. Also the ratio of FDI inflows to approvals had gone up to 52.8 per cent in 2000 compared to 29 per cent in 1996. Around 63 percent find the overall policy framework to be good to average. "The apparent increase in the FDI inflow shows that the improved policy environment is having a positive impact," says a senior official at FICCI. FDI this year has risen by 61 per cent to US$ 2.37 billion in April- November 2001 compared to US$ 1.47 billion in the corresponding period last year. Besides 70 per cent feel that bringing funds into the country is relatively easy and 69 per cent say that funds repatriation can be carried out fairly easily…" Source: India Business World, April 2002. India’s foreign exchange reserves have risen significantly to over US$ 68 billion by the end of December 2002. This has provided the much needed stability to the exchange rate and strengthening of the rupee. The external debt to GDP ratio of the country has improved significantly from 38.7 per cent in 1992 to around 22.3 percent in 2001. Among developing countries, India has one of the lowest external debt to GDP ratios. The value of foreign trade has increased substantially. Both exports from and imports into India are increasing. The total volume of foreign trade in 2001-02 was over US$ 95 billion. In order to boost exports and attract foreign investments, the government had announced in April 2000 the establishment of Special Economic Zones (SEZs) policy. The SEZs would offer world class infrastructure, attractive financial and tax incentives and procedural ease of a duty-free trading area. For all practical purposes, units located in the SEZs are given deemed foreign territory treatment. A unique feature of the transition of the Indian economy has been an element of high growth with stability. Both at the central and state levels and across political affiliations of the Indian federal and state polity, there is consensus on further economic liberalisation. The reforms programme and the market oriented policies of the government are irreversible. Sectoral overview Agriculture Two thirds of India’s population lives in rural areas. Agriculture and related activities are the main source of livelihood for them. The performance of the agricultural sector has continuously been improving (over many decades), helping the country achieve a surplus in food grains production. This has been facilitated through new agricultural techniques and tools acquired by Indian farmers, mechanisation, use of high yielding varieties of seeds, increasing use of fertilizers and irrigation facilities, on-going operational research in the country’s numerous agricultural universities and colleges, etc. With liberalisation of trade in agricultural commodities, India enjoys a competitive advantage in a number of agricultural and processed food products exports. While the share of agriculture in GDP (26.6 per cent in 2000-01) is declining because of faster growth of the services sector, production in absolute terms has been steadily rising. Agriculture accounts for 62 per cent of total employment. Some other key highlights include: • India had a buffer stock of foodgrains (wheat and rice) of nearly 50 million tonnes (Dec. 02) as against the target of 20 million tonnes at any given point in time. This has helped India enter the foodgrains export market in a significant way. • India is the largest producer and consumer of tea in the world and accounts for 28 per cent of world production and 15 per cent of world trade. • Agri-exports account for 13-18 per cent of total annual exports of the country. Agri-exports amounted to over US$ 6 billion in 2000-01. • The value of agricultural imports of inputs like fertilizers, etc. are approximately one-fourth the value of exports.
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Manufacturing India has moved from an agrarian to a manufacturing and services led economy. The manufacturing sector contributes around one-fourth of the total GDP. The country has built a diversified industrial base comprising traditional handicrafts, small, medium and large manufacturing companies and high technology-oriented products. The industrial output has grown to approx US$ 65 billion. The country has emerged as an important global manufacturing hub - many multinational corporations (MNCs) like Pepsi, General Electric (GE), General Motors (GM), Ford, Suzuki, Hyundai, Gillette, LG, etc. have followed India’s economic liberalisation process from close quarters and set up successful operations in the country in recent years. They have been able to leverage cost advantages while adhering to global manufacturing facilities. Companies in the manufacturing sector have consolidated around their area of core competence by tying up with foreign companies to acquire new technologies, management expertise and access to foreign markets. The cost benefits associated with manufacturing in India, have positioned India as a preferred destination for manufacturing and sourcing for global markets. Services The services sector currently accounts for almost half of the country’s GDP. Expanding at a rate of 8-10 per cent per annum, services is the fastest growing sector in the Indian economy. In fact, the growth in India’s GDP, despite the global slowdown, is attributed largely to its strong performance. Availability of highly skilled workers has encouraged many international companies to carry out their research and development activities in India. IT, biotech, tourism, health, financial services and education hold the promise of sustainable high growth. To give a perspective: • The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1 billion in 2001-02. Domestic software has grown at 46 per cent while software exports have grown at 62 per cent over the last 5 years. • The last decade has seen the Indian entertainment industry grow exponentially. The key drivers for this have been technology and the government’s recognition of the importance of the sector. The industry is expected to grow at a compound annual growth rate (CAGR) of 27 per cent. Revenues are projected to increase from US$ 3 billion in 2002 to US$ 10 billion in 2005. • Information Technology enabled Services (ITeS) with elements like call centres, back office processing, content development and medical transcription are key to rapid growth. The sector has an employment potential of 1.1 million by 2008.
Infrastructure The infrastructure sector in India, traditionally reserved for the government, is progressively being opened up for private sector participation. Ports The country has a 7500 km long coastline dotted with numerous major and minor ports. The areas that have been identified for participation and investment by the private sector include leasing out existing assets of the ports, construction of additional assets such as container terminals, cargo berths, handling equipment, repair facility, captive power plants and captive facilities for port based industries. Foreign investment up to 100 per cent equity participation is permitted in ports through the automatic route for construction and maintenance of ports and harbours. A number of private companies have already set up port facilities in the country. Two greenfield ports i.e. Pipavav and Mundra in Gujarat have been set up through private participation and these have been able to compete with existing major ports. Many multinational and domestic players have taken over existing port facilities and are operating them. Recently the container terminal at Chennai port has been taken over by an Australian port major. Roads India has the second largest road network in the world, spanning 3.3 million kilometres. Most of the private investment in this sector has traditionally been through the build-operate-transfer schemes. However, now many new projects are being bid out on toll collection mechanism. Currently, the National Highways Authority of India (NHAI) is implementing the National Highways Development Project (NHDP). NHDP is the largest ever highway development project to be undertaken in the country. The project involves widening of over 13,000 km of highways in the country. The investment for this project is estimated at US$ 13.2 billion at 1999 prices. The project has been broken up into a large number of smaller segments, many of which have been commissioned. Currently work has been completed on 1976 kilometers and another 5222 kilometers of length is under construction. Airports India has 122 airports, controlled by the Airports Authority of India (AAI). The total passenger traffic handled by these airports in 2001-02 was over 40 million, while the cargo traffic handled was around 854,000 tonnes. The government is in the process of leasing out the four major international airports at Delhi, Mumbai, Chennai and Kolkata to private operators. Power Power Sector, hitherto, had been funded mainly through budgetary support and external borrowings. But given the budgetary support limitation due to growing demands from other sectors, particularly social sector and the severe borrowing constraints, a new financing strategy was enunciated in 1991 allowing private enterprise a larger role in the power sector. The all India installed capacity of electric power generating stations under utilities was 104917 MW as on March 2002 consisting of 26261 MW hydro, 74428 MW thermal, 2720 MW nuclear and 1507 MW wind. A capacity addition target of 4764 MW consisting of 1536 MW of Hydro and 3228 MW of thermal was envisaged for the year 2001-02 of which 3115 MW consisting of 1106 MW of hydro and 2009 MW of thermal was achieved. Presently, restructuring and regulatory reforms include bringing about reforms in the State Electricity Boards (SEBs) through establishment of the State Electricity Regulatory Commissions. Reforms are progressing steadily in the sector and privatisation of SEBs have already begun. The government is also planning a massive restructuring of the finances of SEBs and is looking at a one-time settlement of dues of SEBs. In effect, a large amount of liquidity will be injected in the sector. The Ministry of Power has also formulated a Blue Print to provide reliable, affordable and quality power to all users in the country i.e. power on demand by 2012. This requires huge increase in generation capacity, upgradation of existing generation facilities and also the transmission and distribution network. Telecommunications India’s telecommunications network ranks among the top ten countries in the world. One of the world’s largest and fastest growing telecom markets, the country has an investment potential estimated at US$ 39 billion by 2005 and US$ 69 billion by 2010. Despite a strong base of a billion people, the country has a low telephone density of approximately 5 per cent, estimated to grow to 7 per cent by 2005 and 15 per cent by 2010. The government had allowed private participation in cellular services in 1992. The sector witnessed partial de-regulation between 1994 and 1999. The government announced the New Telecom Policy (NTP) in 1999 to further de-regulate the sector with respect to services like basic, international long distance (ILD), national long distance (NLD) and Wireless in Local Loop (WLL) among others. Financial sector The Indian financial sector reforms aim at improving the productivity and efficiency of the economy. It remained stable, even when other markets in the Asian region were facing a crisis. The opening of the Indian financial market to foreign and private Indian players, has resulted in increased competition and better product offerings to consumers. The financial sector has kept pace with the growing needs of corporates and other borrowers. Banks, capital market participants and insurers have developed a wide range of products and services to suit varied customer requirements. A trend towards mergers and acquisitions is expected in the near future due to the compulsions of size and limitations of growth of business on its own vis-à-vis growth through acquisitions. The recent favourable government policies for enhancing limits of foreign investments in the banking sector have generated interest from global banking majors. The Reserve Bank of India (RBI) has ushered in a regime where interest rates are more in line with market forces. This has increased the credit disbursements in the economy which, in turn, will boost industry. Banks and trade financiers have also played an important role in promoting foreign trade of the country. The potential of the sector is evident from existing and projected estimates: • Presently the total asset size of the Indian banking sector is US$ 270 billion while the total deposits amount to US$ 220 billion in a banking network of over 66,000 branches across the country. • The size of the insurance market with only 20 per cent of the insurable population currently insured, presents an immense opportunity to new players. Foreign insurance majors have entered the country in a big way and started joint ventures in both life and non-life areas. Disinvestment The government over the past decade has been increasingly redefining its role from being a provider of goods and services to that of a policy maker and facilitator. Towards this objective, the government has been consistently divesting its stake in various public sector undertakings (PSUs). • Between 1991 and 2002, the government divestment process had yielded US$ 6.3 billion to the national exchequer. Policy Initiatives There has been a paradigm shift in the government’s approach to selling its stake since 31 March, 2000. From selling minority stakes, the government has started divesting majority holdings and transferring management control to strategic investors in profitable undertakings.
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• The government had set up a separate ministry in late 1999 to facilitate the divestment process. It has also set up a cabinet committee and an inter-ministerial group to consider and facilitate specific divestment proposals. • Some of the key highlights of the disinvestment policy are: • The 1991-92 budget considered divestment of 20 per cent government equity in select PSUs in favour of public sector institutional investors, mutual funds and workers. • The Disinvestment Commission (1997-99) made specific recommendations on 58 specific PSUs with respect to disinvestment feasibility and the methodology to be adopted. • The second phase of disinvestment started in 1998-99. Each year since 1999, the government is pushing ahead with reforms and disinvestments. The government has now declared its willingness to reduce its stake below 26 per cent in non-strategic PSUs. The government is now considering disinvestments of the Shipping Corporation of India and two state trading corporations (STC and MMTC) among others. One of the biggest privatisation projects that the government has initiated is the leasing of international airports at the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata. The privatisation mandates will provide a good opportunity to both domestic and foreign investors to pick up stakes in well-performing assets. Policy issues: The government is committed to stimulating the agricultural sector, but balancing this with the need to reduce the fiscal deficit will be a challenge. It will be politically difficult for the government to continue with the disinvestment process, although it will still endeavour to reduce subsidies to state-owned firms. Further liberalisation will expand the role of domestic and foreign private-sector companies. Taxation The top rate of personal income tax and corporation tax for Indian companies is 30%. The corporation tax rate for foreign companies is 40%. However, these rates do not include a 2% hypothecated tax to improve education. All firms pay a 10% tax on distributed profits. Customs duties have been lowered substantially. Foreign trade: India’s trade deficit rose to an estimated US$17.5bn in 2004 in balance-of-payments terms, up from US$8.9bn in 2003. Although exports performed strongly, rising by 31.3% to US$78bn, imports soared by 40% to US$95.5bn, largely owing to the higher international price of oil and to demand for industrial inputs and consumer goods. The US remains India’s largest trading partner, although China has recently become the second-largest market for Indian goods.
Services are the major source of economic growth in India today, though two-thirds of the Indian workforce earn their livelihood directly or indirectly through agriculture. In recent times, India has also capitalised on its large number of highly educated people who are fluent in the English language to become an important location for global companies outsourcing customer service and technical support call centers. It is also a major exporter of skilled workers in software services, financial services, and software engineering. The Three Sectors of Indian Economy Agriculture More than 58% of country's population depends on agriculture, a sector producing only 22% of GDP. While looking at some of the agricultural products, one finds that India is the largest producer of Tea, jute and jute like fibre. India is not only the largest producer but also largest consumer of tea in the world. India accounts for around 14% of the world trade in tea. Indian tea is exported in various forms such as bulk tea, packet tea, tea bags, instant tea etc, to more than 80 countries of the world. Among livestock cattle and buffalo are found maximum in India. Indian total milk production is highest in the world. India has also the privilege of having the 1st rank in total irrigated land in area terms in the world. Among cereals production, India is placed third, having second largest production in wheat and rice and the largest production in pulses. However, the full potential of Indian agriculture as a profitable activity hasn't been realized yet. Agriculture upliftment will not only benefit farmers and a large section of the rural poor, but also will give fillip to overall growth of the economy through the backward and forward linkages of agriculture with the rest of the economy While acceleration in agriculture growth to 4 - 4.5% is imperative, even with such growth rate; share of agriculture in total GDP is likely to reduce further. Therefore, there is a need to absorb excess agricultural labour in other sectors, notably industry. Rapid growth of agro - processing industry close to the agricultural production centers can bring about this shift without moving people from rural to urban areas. Also, public investment in agriculture needs to be augmented, especially in rural infrastructure, irrigation, and agricultural research & development. Better access to institutional credit for more farmers, is also high on priority list. The New trade policy gives focus to agriculture and all the hurdles in Indian agriculture will be crossed gradually. Industry Index of industrial production which measures the overall industrial growth rate was 10.1% in October 2004 as compared to 6.2% in October 2003. The double digit in IIP was aided by a robust growth of 11.3% in the manufacturing sector followed by mining and quarrying and electricity generation. But industrial production saw a decline in Dec 2004 when IIP dipped to 8 %. Thus one of the critical challenges facing Indian economic policy consists in devising strategies for sustained industrial growth. Final phase-out of the MFA and India's conformity with the international intellectual property system from Jan 1st Jan 2005, have been two significant developments in the world of commerce & industry. Textile industry is the largest industry in terms of employment economy from the current US $37 billion to $ 85 billion by 2010 creation of 12 million new jobs in the textile sector and modernization & consolidation for creating a globally competitive textile industry. With the phasing out of quota regime under MFA, from Jan 1st 2005, developing countries including India with both textile & clothing capacity may be able to prosper. Automobile sector has demonstrated the inherent strengths of Indian labour and capital. The pharma industry and the IT industry are two sunrise sectors for India. Among the sectors that have experienced the greatest transformation in India, the pharmaceutical is perhaps the most significant. India's WTO involvement during the last decade has encouraged our pharma companies to adopt a strategy of R & D based innovative growth. Indian pharma exports were 14000 crore Rupees & accounts for more than a third of the industry's turnover. Apart from manufacture of drugs, the pharma industry offers huge for outsourcing of clinical research. A vast pool of scientific and technical personnel & recognized expertise in medical treatment & health care are India's strength, India can take advantages of its strength once patent protection is given to the result of the researches. By participating in the international system of intellectual property protection, India unlocks for herself vast opportunities in both exports as well as her potential to become a global hub in the area of R & D based clinical research outsourcing, particularly in the area of bio-technology. The three main sub sectors of industry viz Mining & quarrying, manufacturing, and electricity, gas & water supply recorded growths of 5%, 8.8% and 7.1% respectively. Apart from infrastructure, particularly adequate and reliable power supply at reasonable cost and transportation facilities, there is need for stepped up investment in manufacturing. Industry needs to grow rapidly not only to boost the overall growth rate in the economy but also to generate gainful employment for the existing unemployed, as well as the new entrants. In a diverse range of industrial activities, several Indian firms have succeeded in getting integrated into global production chains and realized rapid growth of exports. This experience suggests that with appropriate scale, investment and technology, rapid industrial growth is indeed possible. Services Service sector has maintained a steady growth pattern since 96-97, except into a fall in 2000-01 Trade hotels, transport & communications have witnessed the highest growth of level 10.9% in 2004, followed by financial services (With a overall growth rate of (6.4) % and community, social & personal services (5.9)% of all the three sectors, services have been the highest contributor to total GDP growth rate. While in most parts of the developed world, the services sector's share of employment rose faster than its share of output in India there has been a relatively slow growth of jobs in the service sector. This is primarily because of the rise in labour productivity in services in sectors such as information technology that is dependent on skilled labour. Growth in tourism and tourism - related services such as hotels, holds a large potential for employment generation. IT enabled services, such as Business Process Outsourcing have been growing rapidly in the recent past and will continue to rise. India's large number of English speaking skilled manpower has made India a major exporter of software services and software workers. Education for the offshoring industry needs to be given impetus too. The Tsunami, disaster was expected to have a negative impact on India's tourism in terms of large-scale cancellations of tourists to India but nothing of that sort was seen. In fact, tourist arrivals in India rose 23.5 percent in Dec 2004 and tourist arrivals crossed 3 million mark for the first time in 2004. VAT Value-Added Tax, one of the most radical reforms to be proposed for the Indian economy, could finally become a reality after four years of political and economic debate. So far 21 States have given their nod for the April 1 2005 deadline for switching over to VAT. The decision to introduce VAT was publicly discussed first at a conference of state chief ministers and finance ministers in November 1999. At that time, the deadline of April 2002 was agreed upon to bring in VAT but it couldn't be implemented due to political instability and a lack of initiatives. Now, despite a backlash from the trading community and some political circles, there appears to be a realistic scope for VAT to be introduced. VAT is a sales tax collected by the government (of the state in which the final consumer is located) - which is the government of destination state on consumer expenditure. Over 120 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it. India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods. VAT would, however, be collected in stages (instalments) from one stage to another. The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value-addition done - leading to a total tax burden exactly equal to the last point tax. VAT is necessary, as it will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases. Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At a macro level, there are two issues, which make the introduction of VAT critical for India. First, Industry watchers say that the VAT system, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government. |
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