India - Overview

An Expert's View about Business Environment in India

Posted on: 30 Jul 2012

Latest Development
•India’s economy expanded 5.3% year-on-year (YoY) in the first quarter of 2012, slower than 6.1% as reported in the last quarter of 2011. In FY2011-12, the economy grew 6.5%, down from 8.4% in the previous fiscal year.
•India’s wholesale price index (WPI), a gauge of the country’s inflation, rose 7.55% YoY in May 2012, up slightly from 7.23% in the previous month. In April 2012, the Reserve Bank of India (RBI, the country’s central bank) cut the benchmark repo rates by 0.5 percentage point to 8% after hiking rates for 13 times since March 2010.
•India’s industrial production gained 0.1% YoY in April 2012, after a 3.2% decline in the previous month. Exports fell 4.2% YoY in May 2012, while imports dropped 7.4% YoY in the same month.
•India has signed free trade agreements (FTAs) with Singapore, Thailand, Indonesia, the ASEAN, South Korea and Japan. The government has indicated that more FTAs will be signed in the lead up to 2014. The government estimates that free trade measures will help achieve the export target of US$500 billion by FY2013-14.
•In the first five months of 2012, India was the fourth largest export market of Hong Kong. Total exports to India plummeted 16.1% YoY to US$4.2 billion.

Current Economic Situation

India’s economy expanded 5.3% year-on-year (YoY) in the first quarter of 2012, slower than 6.1% as reported in the last quarter of 2011. In the FY2011-12 which ended March 2012, the economy grew 6.5%, down from 8.4% in the previous fiscal year, resulting from the slowdown in both the agricultural and manufacturing sectors.

India’s wholesale price index (WPI), a primary gauge of the country’s inflationary pressures, rose 7.55% YoY in May 2012, up slightly from 7.23% in the previous month. Food price inflation at the wholesale price level also increased to 10.74% YoY as of end-May. In April 2012, the Reserve Bank of India (RBI, the country’s central bank) cut the key benchmark repo rate (the lending rate of RBI to the banking sector) by half a percentage point to 8%, after hiking rates for 13 times since March 2010. In the face of the dilemma of slow economic growth and persistently high inflation, the RBI kept the benchmark repo rate at 8% and the cash reverse ratio at 4.75% in mid-June 2012. With economic growth in Q1 2012 far worse than expected, the RBI will likely keep nudging rates down in response to signs of slowing inflation.

India’s exports fell 4.2% YoY in May 2012 while imports dropped 7.4% YoY in the same month. In FY2011-12, Indian exports surged 20.9% to US$304 billion. The significant moderation was attributed to the dismal economic and financial conditions in the US and Eurozone economies.

India has signed free trade agreements (FTAs) with Singapore, Thailand, Indonesia, the ASEAN, South Korea and Japan. The Indian government has indicated that more FTAs will be signed by 2014. It also estimates that those free trade measures will help achieve the export target of US$500 billion by FY2013-14.

Industrial production gained 0.1% YoY in April 2012, after a 3.2% decline in the previous month. The poor performance was led by the contraction in capital goods (down from 6.6% to -16.3%), intermediate goods (from 3.9% to -1.4%) and basic goods (from 7.1% to 2.3%). 10 out of the 22 industry groups in the manufacturing sector displayed negative growth in output. Regarding “Electric Machinery and apparatus”, “Office, Accounting and Computing Machinery” and “Wearing apparel, dressing and dyeing of fur”, they contracted, respectively, 49.2%, 14.9% and 9.1% from the year-earlier period.

India depends heavily on its service industries for economic expansion, and it holds a dominant share of the global offshore information technology and business process outsourcing (IT-BPO) market. It is estimated that the IT-BPO industry contributed to 7.5% of India's GDP in FY2011-12. Exports of IT-BPO services were mainly to the developed countries, in particular the US and Europe, which accounted for respective shares of 62% and 28%. Although IT-BPO services constitute only a small share of the overall economy, it is estimated that they grew 9.8% in FY2011-12, making them one of the fastest growing sectors in India.

India is riding on a retail boom bolstered by its fast expanding middle class and young consumers. According to a Technopak report in December 2011, India’s retail market size will move up from about US$470 billion in 2011 to about US$675 billion in 2016. With the world’s second largest population (over 1.2 billion), India has a huge consumer base with increasing discretionary spending. The National Council for Applied Economic Research's (NCAER) Centre projects that the share of middle class as a share of the country’s population will increase from 13.1% in FY2009-10 to 20.3% by FY2015-16, reaching 37.2% by FY2025-26. An expansion of middle class population will create many opportunities in India’s retail sector.

Retail channels in India have been fast modernising, with many malls and hypermarket adding sales space every year. Organised retail accounted for 7% of India’s retail market in 2011 and is expected to reach 20% by 2020 as per an A.T. Kearney report in 2011. Hypermarkets have gained prominence in the retail market. About 30% of organised retail sells clothing, which has shown promising growth in recent years.

Foreign direct investment (FDI)

In FY2011-12 (April 2011 - March 2012), India's FDI inflow amounted to US$36.5 billion, up 88% from the year-earlier period. The inflow was mainly from Mauritius (US$9.9 billion; 27% of total), U.K. (US$9.3 billion; 25%) and Singapore (US$5.3 billion; 14%). During the same period, the chemicals (other than fertilizers) attracted the highest FDI inflow (US$7.3 billion), followed by services sector (US$5.2 billion), and drugs and pharmaceuticals (US$3.2 billion).

India's economic policies are designed to attract significant capital inflows into the country on a sustained basis and to encourage technology collaboration between Indian and foreign firms. Almost all sectors are opened to foreign investment with varying percentages of foreign ownership allowed, except for atomic energy, lottery business, gambling and betting,  and some forms of retail trading. Since November 2011, FDI is allowed up to 100% in retail trade in single brand products in India, while multiple-brand retail is still currently closed to FDI. The government is trying to achieve a political consensus to liberalise the multiple-brand retail sector. Under India's foreign investment policy, two routes are available for foreign investors, depending upon the industry and the levels of investment contemplated:

1) Automatic Route

Foreign investment proposals under the automatic route will not be subject to any government approval, provided the requisite documents are filed with the Reserve Bank of India within 30 days of receipt of funds. Qualified sectoral investment includes hotels & tourism, and courier services, etc.

2) Foreign Investment Promotion Board (FIPB)

All other proposals for foreign investment, which are not covered under the automatic approval route, are considered for approval, on merits, by the FIPB.

Special Economic Zones (SEZs)

India’s government implemented the SEZ Policy in 2000, and passed the SEZ Act 2005 to facilitate the establishment of SEZs in selected areas. Within these SEZs, special incentives, such as market access, tax exemptions and fast-track single window clearance are provided to investors. As of end-May 2012, more than 584 SEZs had been approved and notified under the SEZ Act 2005, with total employment of around 300,000 people. Exports from the SEZs amounted to Rs315,868 crore (about US$69 billion) in FY2010-11, up 43% YoY.

Trade Policy

India’s government has embarked on economic liberalisation since 1991 and continued to work towards a more open trade regime. There has been elimination of quantitative restrictions, simplification of import licence application and reduction of import tariffs. Since 1992, the government has loosened the licensing requirement for imports of capital goods. In March 2001, the government abolished the system of special import licences and the restricted list of imports, leaving only a small negative import list. The results of trade reform have been remarkable, with nearly 14 million jobs created directly or indirectly due to the increase in exports in the period 2004-2009.

Almost 95% of tariffs are in ad-valorem. India lowered the simple average applied MFN tariff to 13% in 2009, less than half of its value in 2004, with average rates of 31.8% for agricultural products and 10.1% for non-agriculture products. The relatively high tariff was to safeguard the interests of low income and resource poor agricultural producers. India also initiated a large scale anti-dumping action, with 206 measures in force as of June 2011.

The Foreign Trade Policy 2009-14 is the major policy governing foreign trade in India. In general, the policy includes seven point strategies to boost exports, namely thrust to employment intensive industry, encouragement to domestic, manufacturing for exports, promote technological upgrade, strong market diversification, encouragement of exports from North-Eastern Region, incentivize  manufacturing of green technology products and reduction in transaction cost. Apart from that, there is an increased focus on FTA. New trade agreements are under negotiations with the EU, New Zealand, Australia and Canada.

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Posted: 30 July 2012

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