India is among the world’s fastest growing economies, helped by its 1.3 billion strong population, low manufacturing and scalability costs, a huge youth cohort, business-friendly government, political stability based on period democratic elections, and strategic location for global trade. India also serves as an ideal base for Asia-bound investment, with connectivity infrastructure, regulatory reforms, and tax incentives providing a highly enabling environment for multinationals.
Foreign direct investment (FDI) into India reached US$81.7 billion in FY 2020-21, as per the country’s official sources. The UNCTAD World Investment Report 2021 notes that India was the fifth largest FDI recipient in the world in 2020 and its incoming FDI rose 27 percent over 2019, driven by information and communications technology (ICT) investments.
- India has a strong economic track-record, despite the pandemic blip, and key reforms to liberalize market access and ease doing business make the country an attractive investment destination for foreign investors.
- Most sectors are open to FDI.
- India’s digital economy offers some of the brightest prospects with over 300 million internet subscribers.
- India has a significant and growing middle-class, presenting new opportunities for market penetration in areas like tier-2 and tier-3 cities for goods ranging from consumer durable goods to automobiles to healthcare besides digital services.
- Business reforms have quickened the set-up process through single-window and electronic platforms. Indian states compete to provide the most efficient turnaround of bureaucratic services, which can be a key market-entry consideration above operating cost.
- India is the seventh largest country in the world by land area. Land availability across the country is also being made transparent through an online GIS-based industrial land bank, which includes vacant plots and industrial parks.
- India’s upcoming foreign trade policy is expected to push the One District, One Product (ODOP) initiative to incentivize export-oriented production.
Why is India attractive for foreign businesses?
India’s strategic location
Located in South Asia, India is bounded by the Indian Ocean to the south, the Arabian Sea to the southwest, and the Bay of Bengal to its southeast. India shares international land borders with Pakistan to the west; China, Nepal, and Bhutan to the north; and Bangladesh and Myanmar to the east. In the Indian Ocean, India is near Sri Lanka and the Maldives. The Andaman and Nicobar Islands, a Union Territory of India, shares a maritime border with Thailand, Myanmar, and Indonesia.
Ease of doing business
India’s ranking on the World Bank’s Doing Business Report (DBR) of 190 countries, jumped from 142 in 2014 to 63 in 2020. India was among the world’s top 10 improvers for the third consecutive year. The focus of business reforms continues to be reduction in the compliance burden through technology solutions, third-party assessment, and faceless human intervention.
Some reforms are:
- E-Biz, a single-window online portal, to provide access to core services required to obtain the necessary clearances, licenses, and complete mandatory tax registrations and regulatory filings required to operate the business or industrial unit.
- The online form for company incorporation (INC 32) by the Ministry of Corporate Affairs (MCA), which combines three processes – searching for name availability before incorporating of a company, applying for director identification number, and incorporating the company. A company can be registered within one or two working days by filing the INC 32 form.
- Allowing FDI in limited liability partnerships (LLP) subject to the condition that the LLP is engaged in sectors where 100 percent FDI is allowed under the automatic route and no FDI-linked performance conditions exist.
- Permitting a company with foreign investment to convert to LLP under the automatic route if the company is engaged in a sector where 100 percent FDI is allowed.
- The Shram Suvidha online portal to function as a single point of reporting for compliance with various labor laws.
- The Companies (Amendment) Act 2015 removed the requirements of a minimum paid-up capital and common seal for companies and the need for a certificate of commencement of business for private companies.
- The Insolvency and Bankruptcy Code, 2016 was enacted to facilitate faster resolution of insolvency proceedings related to companies and individuals. The Act aims to complete the insolvency resolution process within 180 days from commencement.
Many Indian states have also set up a Single Window Portal that functions as a common point of contact for starting a business and to secure permits and approvals from relevant government departments. Most states permit users to register for online services across departments, such as land, labor, environment, tax, and utilities. These reforms improve transparency, speeds up investment facilitation, and introduces predictability for businesses.
The Department for Promotion of Industry and Internal Trade (DPIIT) also tracks the total (listed) land available for industrial development in India, by state and sector via an online portal that can be accessed from its website.
Tax cuts and incentives
India cut the corporate tax rate for domestic companies in 2019, whereby new companies would be subject to a 22 percent rate and new domestic manufacturing companies, 15 percent. The Taxation Laws (Amendment) Act, 2019 inserted Section 115BAA into the Income-tax Act, 1961, which provides the concessional tax regime (22 percent) for domestic enterprises if they do not avail of specific tax incentives or deductions. (The effective tax rate for these domestic companies is around 25.17 percent inclusive of surcharge and cess.)
Those companies opting for the concessional corporate tax rate also do not have to pay minimum alternate tax. As a result, India’s current effective tax rate brings it at par, on average, with leading Asian investment destinations and manufacturing hubs like China, Vietnam, Malaysia, Singapore, and South Korea.
Strengthening intellectual property protections
India has been a World Trade Organisation (WTO) member since 1995. WTO member nations must include some IP protection in their national laws. India is also a signatory to the following international IP agreements:
- Paris Convention: Under this convention, any person from a signatory state can apply for a patent or trademark in any other signatory state and will be given the same enforcement rights and status as a national of that country would be.
- Berne Convention: Under this convention, each member state recognizes the copyright of authors from other member states in the same way as the copyright of its own nationals.
- Madrid Protocol: Under this convention, a person can file a single trademark application at their national office that will provide protection in multiple countries.
- Patent Cooperation Treaty: This is a central system for obtaining a ‘bundle’ of national patent applications in different jurisdictions through a single application.
India is, however, not a signatory to the Hague Agreement, which would have enabled the protection of designs in multiple countries through a single filing.
The following laws provide the legal basis for intellectual property protections in India and are periodically reviewed and amended as new technological developments and market reforms necessitate the case to be:
- Laws and regulation – Patents Act, 1970; Patents (Amendment) Act, 2005; Patents Rules, 2003; Patent (Amendment) Rules, 2020
- Relevant ministry – Office of the Controller General of Patents, Designs and Trade Marks (Indian Patent Office), Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and industry
- Laws and regulation – Trademark Act, 1999; The Trade Marks (Amendment) Act, 2010; Trade Marks Rules, 2003; Trade Marks Rules, 2017
- Relevant ministry – DPIIT, Ministry of Commerce and Industry
- Laws and regulation – Copyrights Act 1957; The Copyright (Amendment) Act, 2012; Copyright (Amendment) Rules, 2021
- Relevant Ministry – Copyright Office, Ministry of Human Resource Development
- Law and regulation – Designs Act, 2000; Designs Rules, 2001; The Designs (Amendment), Rules, 2021
- Relevant Ministry – DPIIT, Ministry of Commerce and industry
- Law and regulation – The Geographical Indications of Goods (Registration and protection) Act, 1999; The Geographical Indications of Goods (Registration and Protection) (Amendment) Rules, 2020
- Relevant Ministry – DPIIT, Ministry of Commerce and industry
India possesses a large labor pool as almost half its population of 1.2 billion is of working age. Naturally, the structure of India’s labor market is diverse; foreign companies need to understand this structure to benefit from India’s demographic dividend.
Much of the working population is engaged in the unorganized, or informal sector, working for small businesses or manufacturing units that employ less than ten individuals. Businesses that don’t need skilled labor can source employees with some ease.
The expansion of higher education has created a larger skilled talent pool, but it still only amounts to about ten percent of the country’s overall labor market. Companies seeking skilled labor need to be prepared to compete to recruit from this comparatively small pool.
Structure of labor in India
The government’s labor laws usually classify employees based on skill and area of operation. In terms of skill, employees are categorized as unskilled, semi-skilled, skilled, and highly skilled. In terms of area of operation, employees are categorized as managerial personnel and workmen. This defines their job roles, wages, disbursal of benefits, and their rights and obligations.
Labor costs in India
Firms entering the Indian market often choose to make the decision after assessing the comparative costs of labor. India offers competitive advantages with its lower wage structure and access to a vast labor market. For instance, India offers the most competitive labor costs in Asia, with the national-level minimum wage at around INR 176 (US$2.80) per day, which works out to INR 4,576 (US$62) per month.
Employers should note that the minimum wage in India is indicative; it is often utilized as a benchmark, especially in the employment of unskilled and semi- skilled labor in the manufacturing sector.
Labor costs also vary by region in India; wages in tier two and three cities are much lower than tier one due to lower costs of living and affordable real estate. The difference in salary pay scale can be up to 25 percent as the city compensatory allowance and employee conveyance allowance is a much smaller portion of pay checks in tier two and three cities when compared with tier one cities. Therefore, for instance, the average salary of a software engineer in New Delhi is US$7,632.53 while in Mysore it is US$6,621.47.
Seeking local expertise is important
Foreign entities doing business in India can learn more about the minimum wages in India through the Ministry of Labor and Employment database, which provides industry-wise wage norms. The new wage code can be accessed here, and the website for the chief labor commissioner can be accessed here.
Since determining wages in India is complex, and labor compliances are carefully monitored, it is recommended to seek advice from a local firm to assess costs and other liabilities. Otherwise the firm may be exposed to additional risks during times of labor unrest and strikes by workers that can lead to reputational and financial damage to the company.
Quality of life
India’s tier-2 and tier-3 cities (classified according to population density) are fast emerging as attractive destinations for businesses and professionals in the country. Often, these regions boast of higher livability standards, lower costs, and sector-based incentives for businesses. Prominent tier-2 and tier-3 cities are also well connected to major metropolises by road, metro, airways, and railways, which is why increasingly, talent is relocating to these new hubs – making it easier for local recruiters as well.
What Makes the Indian Economy Tick?
India jumped four positions to rank 48 on the Global Innovation Index 2020 rankings, ranking #1 in central and south Asia and #3 among lower middle-income countries. Its tax reforms, particularly the Goods and Services Tax, has established a common national market in the country. Multiple modernization initiatives have expanded industrial capacity, boosted digitalization and contributed to the growth of start-ups, and advanced infrastructure and connectivity logistics. These have introduced transport efficiencies and are steadily lowering operating costs. India’s vast land size (seventh largest in the world) and topography has resulted in several states being rich in natural resources, including renewables. Nine states in India are along its maritime coastlines – Gujarat, Maharashtra, Goa, Karnataka, Kerala, Tamil Nadu, Andhra Pradesh, Odisha, and West Bengal.
Indian industries driving the economy
India’s services sector accounts for the largest in terms of sector-based contribution to the gross domestic product (GDP).
Sectoral GDP in India 2020-21 at current Prices
Share in %
Agriculture, forestry and fishing
Electricity, gas, water supply and other utility services
Mining and quarrying
Financial, real estate and professional services
Public administration, defense, and other services
Trade, hotel, communications and broadcasting related services
India’s natural resource availability
Apart from its human resource, India’s topography is well endowed with mineral resources. Some of India’s mineral resources include iron ore and ferroalloys—notably manganese and chromite that are widely distributed over peninsular India. Other exploitable metallic minerals include copper, bauxite (the principal ore of aluminium), zinc, lead, gold, and silver. Among important non-metallic and nonfuel minerals are limestone, dolomite, rock phosphate, building stones, ceramic clays, mica, gypsum, fluorspar, magnesite, graphite, and diamonds.
There are five different mineral belts in the country, which include the north-western belt, south-western belt, southern belt, central belt, and north-eastern peninsula belt.
Currently, India is ranked as the second largest producer of coal in the world, and some of the leading states that produce coal are Jharkhand, Odisha, Chhattisgarh, West Bengal, and Madhya Pradesh.
India’s infrastructure development
The Indian infrastructure sector has a multiplier effect on several other sectors. India is expected to become the world’s third largest construction market by 2022.
To ease progress in India’s infrastructure, the government has implemented policies to minimize bureaucratic delays, which include simplification of land acquisitions, faster clearance/approvals from relevant authorities, using technologies such as On-line Computerized Monitoring System (OCMS) and Pro Active Governance and Timely Implementation (PRAGATI) to improve project monitoring, and creating cost committees at the federal level to monitor cost overruns.
The government launched the National Infrastructure Pipeline (NIP) for FY 2019-25, under which projects have been identified to construct, refurbish, strengthen, and expand roads networks, housing, urban development, railways, conventional power, renewable energy, and irrigation. Key programs will focus on highways and railways. The Industrial Corridor Projects, part of the National Industrial Corridor program, is an example, and aligns with the development of industrial cities and improving inter-city connectivity so that they can compete with top global investment destinations. In addition, the government has also established a Special Purpose Vehicle for construction, operation, and maintenance of dedicated freight corridors under the Dedicated Freight Corridor (DFC) program that aims to decongest the existing rail network by constructing dedicated tracks for goods trains. Currently, the construction work for both projects is in full swing.
For port infrastructure, since its launch, the Sagarmala Program (2015-2035) has identified more than 574 projects worth INR 6.01 trillion across areas of port modernization and new port development, port connectivity enhancement, port-linked industrialization, and coastal community development. As of September 30, 2019, a total of 121 projects at a cost of INR 302.28 billion have been completed and 201 projects at a cost of INR 3.09 trillion are under implementation. The states of Gujarat, Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu, among the top investment destinations in India, account for the country’s ports and sea routes.
India’s GDP growth
Real GDP, that is, GDP at constant (2011-12) prices in the year 2020-21 is estimated at INR 13513 billion (US$181.48 billion), as against the First Revised Estimate of GDP for 2019-20 of INR 14569 billion (US$195.66 billion). The growth in GDP during 2019-20 is estimated at -7.3 percent.
Nominal GDP or GDP at current prices in the year 2020-21 is estimated to reach around INR 19746 billion (US$265.19 billion) against the First Revised Estimates of INR 20351 billion (US$273.32 billion) in 2019-20, showing a change of -3.0 percent.
According to the IMF World Economic Outlook (April - 2021), India's nominal GDP in 2021 is projected at US$3050 billion at current prices. This projection would make India the sixth largest economy globally, one position down from 2019.
India contributes 3.25 percent of the world's GDP. India's share of the world economy increased from 1.08 percent in 1993 to the current estimate of 3.27 percent in 2019.
Indian government’s public debt
As on March 31, 2021, India’s external debt was placed at US$570 billion, recording an increase of US$11.5 billion since March 31, 2020. Commercial borrowings remained the largest component of external debt, with a share of 37.4 percent, followed by non-resident deposits (24.9 percent) and short-term trade credit (17.1 percent).
Indian government’s main sources of revenue
The government receipts (excluding borrowings) are estimated to be INR 19764.24 billion (US$265.40 billion) in 2021-22, according to Union Budget 2021-22. Out of the total receipt estimates, revenue receipts are estimated at INR 17884 billion (US$240.15 billion). These revenues are earned from tax and non-tax sources. Direct taxes include income tax, real property tax, personal property tax, or taxes on assets. Some of the indirect taxes include GST, customs duty, and tax deducted at source (TDS). Top receipts under non-tax revenue include interest and dividends and profits received from public sector companies.
India’s net tax revenue is estimated at INR 15453 billion (US$207.52 billion). India’s non-tax revenue in 2021-22 is estimated to be INR 2430.28 (US$32.63 billion).
India’s current currency strength
The Indian Rupee (INR) stands at 74.47 against the US dollar (USD) as on July 26, 2021. The Covid-19 pandemic as well as strengthening of the USD has led to weakening of the INR, especially since April 2021. However, the Reserve Bank of India has announced quantitative easing measures in June 2021 to support economic growth and these measures may have a positive impact on containing the exchange rate volatility and currency weakening.
India’s current trade strength
Total exports from India (merchandise and services) stood at US$439.64 billion between April 2020 and February 2021, while imports totaled US$447.44 billion, according to data from the Ministry of Commerce and Industry.
The estimated value of services export and import for 2020-21 stood at US$183.46 billion and US$106.64 billion, respectively.
India's foreign exchange reserves stood at US$ 582.04 billion, as of March 12, 2021, according to data from the RBI.
Inbound FDI into India in FY 2021
Indian government data showed that FDI equity inflow contributed to US$59.64 billion out of the total US$81.72 billion that the country received in FY 2020-21. This inward FDI equity showed a 19 percent growth over the previous fiscal, which stood at US$49.98 billion. A major proportion (US$51.47 billion) of this inflow was received during the first nine months of FY21, that is from April to December 2020, with the highest surge recorded in August 2020. Singapore, which is also a gateway to ASEAN markets, was India’s top foreign investor in FY21, responsible for FDI equity amounting to US$15.71 billion during April-December 2020. In total, Singapore contributed to 29 percent of India’s FDI inflow. The US was India’s second highest investor, accounting for a 23 percent share in the FDI received. and a 227 percent rise when compared to the preceding financial year.