BUSINESS AND INVESTMENT CLIMATE IN INDIA

ECONOMIC FACTORS

The Indian economy rapidly integrates with the world economy. A foreign investor who is interested to undertake business in India will find tremendous opportunities. The Industrial Policy of India offers a great deal of freedom to business houses and entrepreneurs to make their own investment decisions.

India has seriously gone through more than a decade of economic reforms. Continuity in the economic / global liberalisation process and the political consensus that economic change necessitates has placed India on a growth path.

According to Central Statistical Organisation (CSO), real Gross Domestic Product (GDP) grew by an impressive 8.7% during the financial year 2007-08. Notably, the agricultural sector grew by 2.6% and the industrial and services sector grew by 8.6% and 10.6% respectively.

Foreign exchange reserves

India’s foreign currency assets have been increasing steadily. Foreign currency reserves (including valuation changes) as at August 1, 2008 were US$ 305.47 billion. In recent years, India’s balance of payments has been characterised by surplus in both the current and capital accounts.

The steady accumulation of reserves, made possible by a strong balance of payment position in recent years, establishes India as the sixth largest reserve holder in the world. These reserves provide an opportunity to engage in further trade reforms.

Exchange rate movements

During 2007-08, the Indian rupee generally exhibited two-way movements. The rupee moved in the range of INR 39.26-43.15 to a US$ during 2007-08. The rupee depreciated during the first half of August 2007 due to bearish conditions in the Asian stock markets including India, strong FII outflows and concerns over sub-prime lending crisis in the US, while it appreciated thereafter reflecting large capital inflows, weakening of the US dollar vis-a-vis other currencies and strong performance in the domestic stock markets. However, the rupee started depreciating against the US dollar from the beginning of February 2008 on account of bearish conditions in the stock market, capital outflows, rising crude oil prices and increased demand for US dollars by corporates.

During 2008-09 so far, the Indian rupee generally depreciated. The rupee moved in the range of INR 39.89-43.16 to a US$ during the first quarter. The exchange rate of the rupee was INR 46.97 to a US$ on November 05, 2008.

Foreign Direct Investment

– Continuous liberalization in the Foreign Direct Investment (FDI) policy and simplification of procedures are contributing immensely to attracting increased FDI into India. The fact that the Government is now annually conducting a review of the FDI Policy and Procedures has given an added confidence to the foreign investors that their concerns are addressed on a continuous basis.

– FDI equity inflow during the financial year 2007-08 at nearly US$ 24.6 billion has shown growth of 56% over the inflow received during the previous year. This is the highest FDI equity inflow into the country during any financial year since the commencement of economic reforms. FDI equity inflow in the month of February 2008 was US$ 5.7 billion which is the highest inflow received so far in a single month. During the first quarter of calendar year 2008, the FDI inflows have been US$ 11.9 billion compared to US$ 6.5 billion for the corresponding quarter in 2007.

Major share of countries in FDI in the last two years are as follows

– USA

– UK

– Mauritius

– Singapore

– Cyprus

– Japan

– Netherlands

– Germany

– U.A.E.

– France

Sectors attracting the highest FDI inflows in the last two years are as follows:

– Services (financial and non financial)

– Housing and real estate

– Construction activities (including roads and highways)

– Computer software and hardware

– Telecommunications (radio paging, cellular mobile, basic telephone services)

The cumulative FDI equity inflows in India during the period August 1991 to March 2008 stood at US$ 79.21 billion.

The Central Government has undertaken the following sweeping economic reforms aimed at opening up the economy and embracing globalization has been instrumental in the surge in FDI inflows:

– restructuring the FIPB

– establishment of the Indian Investment Commission to act as a one stop shop between the investor and the bureaucracy

– expanding the number of industries for which 100% FDI is allowed through the Automatic route

– progressively raising the FDI cap in other sectors like telecom, aviation, banking, petroleum and media sectors among others

– removal of the investment cap in the SSI sector

With further liberalization measures across a broad range of sectors in the pipeline and continued investor interest, the inflow of FDI into India is likely to further accelerate.

Inflation

Inflation has become a global phenomenon in recent months. Inflation pressures have raised serious concerns in emerging market economies (EMEs) across Asia, Latin America and Africa, mainly on account of supply-demand imbalances in food, fuel and commodity markets. In India, inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, increased to 11.89% from 7.75% as at March 2008 and 4.76% a year ago, largely due to spiraling crude oil prices around the world.

Composition of trade

The export growth in 2006-07 was broad with the agriculture and manufacturing sector, chemical and related products, leather goods and gems and jewellery being major contributors. This trend continued in the period April 2007 to March 2008 with improvements in exports of ores and minerals, and gems and jewellery. Import growth was also broad-based with significant increases in imports of food and allied products, crude oil, capital goods, raw materials such as iron and steel, non-ferrous metals and metal scrap. For 2006-07 exports were at US$ 126.36 billion and imports at US$ 185.75 billion. India recorded a 22.6% growth rate in exports in comparison to 2005-06.

India’s Services trade

With a sustained high growth of export of services, including a growth of 32.1% in 2006-07, export value reached US$ 76.2 billion in the year 2007-08. Growth has been particularly rapid in the miscellaneous services category consisting of software services, business services, financial services and communication services. Growth of these services was 36.7% in 2006-07. Travel services exports grew by 16.2% and transportation by 27.3% in 2006-07. India’s share in world commercial services exports increased from 2.3% in 2005 to 2.7% in 2006 with its ranking improving from 11 to 10. Imports of commercial services have become important in recent years reaching US$ 44.4 billion in 2006-07 with a growth of 28.7%. Business service is the most important category of services in imports, followed by transport and travel. Business services grew by 120.6% in 2006-07.

India’s major trading partners

USA

China

UAE

Saudi Arabia

Germany

Singapore

Agriculture

The total food grains production in 2007-08 was 219.3 million tonnes compared with 217.3 million tonnes in 2006-07. The growth is attributed due to near normal rainfall across the country.

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