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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.

India’s International Free Trade and Tax Agreements

Over the last two years, India has been talking free trade agreements with several partners – both bilateral and regional – in a bid to boost export-oriented domestic manufacturing. India aims to achieve an export shipment target of US$450-$500 billion by FY22, up from US$291 billion in FY21. Consequently, early harvest deals and full FTAs have assumed newfound importance to an otherwise trade conservative regime.

Earlier, in 2019, India opted out of the Regional Comprehensive Economic Partnership (RCEP), a trade pact including the 10 ASEAN member countries, Australia, New Zealand, Japan, South Korea, and China. The RCEP will come into effect in 2022. Nevertheless, there is now a growing list of countries and regional blocs that are negotiating separate trade deals with India – including UK, UAE, Australia, Russia, Oman, and the Southern African Customs Union, which consists of Botswana, Lesotho, Namibia, South Africa, and Swaziland.

This position taken by India appears to indicate a preference for bilateral trade arrangements or regional trade arrangements that will not dislodge local producers and small-scale businesses, such as by way of an influx of Chinese manufactured goods or New Zealand dairy products, which was among the reasons why India ultimately chose to exit the RCEP grouping.

Read more about India's international FTAs in this section.

Why Do Foreign Businesses Relocate to India?

A major investment hub in South Asia and well connected to central, west, southeast, and east Asian countries, India is a prime location for foreign multinationals. The country has doubled down on efforts to diversify its economy resulting in the prominence of its services sectors, boosted by ICT capabilities and English as the lingua franca. According to UNCTAD, India was the fifth largest FDI recipient in the world in 2020. This shows that as geopolitical events transpire, India is emerging as a reliable alternate destination for manufacturers and supply chain diversification due to its large labor and consumer base, low operating costs, and linkages to important international markets.

Gain insights about relocating to India here.

India’s strategic location with superb connectivity

India's location at the head of the Indian ocean is of strategic importance and connects it with the Middle East, Europe, and West Africa from the western coast and Southeast Asia and East Asia from the eastern coast. India’s transit sea routes thus connect Europe with East Asia. India also has the longest coastline in the Indian ocean.

Besides, India’s internal connectivity has also drastically improved. The country has the second largest road network and fourth largest rail network in the world and seven international airports.

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.

Investment facilitation

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.

Top 10 States - Ease of Doing Business Rankings

Rank

2015

2016

2017

2019

1

Gujarat

Andhra Pradesh, Telangana

Andhra Pradesh

Andhra Pradesh

2

Andhra Pradesh

-

Telangana

Uttar Pradesh

3

Jharkhand

Gujarat

Haryana

Telangana

4

Chhattisgarh

Chhattisgarh

Jharkhand

Madhya Pradesh

5

Madhya Pradesh

Madhya Pradesh

Gujarat

Jharkhand

6

Rajasthan

Haryana

Chhattisgarh

Chhattisgarh

7

Odisha

Jharkhand

Madhya Pradesh

Himachal Pradesh

8

Maharashtra

Rajasthan

Karnataka

Rajasthan

9

Karnataka

Uttarakhand

Rajasthan

West Bengal

10

Uttar Pradesh

Maharashtra

West Bengal

Gujarat

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.

Corporate Tax Rate for FY 2022

 

Types of companies

Income up to INR 10 million (US$131,687)

Above INR 10 million (US$131,687) up to INR 100

million (US$1.3 million)

Above INR 100 million (US$1.3 million)

 

Surcharge rate

Effective tax rate

Surcharge rate

Effective tax rate

Surcharge rate

Effective tax rate

Domestic - turnover not exceeding INR 4,000 million in FY 2018-19 (claiming

exemption / incentives)

 

Nil

 

26.00%

 

7%

 

27.82%

 

12%

 

29.12%

All domestic companies not claiming tax exemption / incentives*

 

10%

 

25.17%

 

10%

 

25.17%

 

10%

 

25.17%

New domestic manufacturing (set up and registered on

or after March 1, 2016)**

 

Nil

 

26%

 

7%

 

27.82%

 

12%

 

29.12%

New domestic manufacturing (set up and registered on or after October 1, 2019)***

 

10%

 

17.16%

 

10%

 

17.16%

 

10%

 

17.16%

Other domestic

Nil

31.20%

7%

33.38%

12%

34.94%

Foreign

Nil

41.60%

2%

42.43%

5%

43.68%

* Compliant with prescribed conditions under section 115BAA;** Compliant with prescribed conditions under section 115BA

*** Compliant with prescribed conditions under section 115BAB

Note: Health and education cess of 4 percent has been considered for determining the tax rates mentioned above.

Strengthening intellectual property protections

India has been a World Trade Organization (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:

Patents

  • 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

Trademarks

  • 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

Copyrights

  • Laws and regulation – Copyrights Act 1957; The Copyright (Amendment) Act, 2012; Copyright (Amendment) Rules, 2021
  • Relevant Ministry – Copyright Office, Ministry of Human Resource Development

Industrial designs  

  • Law and regulation – Designs Act, 2000; Designs Rules, 2001; The Designs (Amendment), Rules, 2021
  • Relevant Ministry – DPIIT, Ministry of Commerce and industry

Geographical indications

  • 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

Latest IP reforms to ease doing business

Amendments to patent and trademark rules
  • Timelines are imposed for speedy disposal - number of adjournments has been limited in hearings.
  • Special provisions made for Start-ups & MSMEs.
  • E-filing encouraged through 10% rebate in fees.
  • Under Trade Mark Rules, 74 Forms have been replaced by 8 Consolidated Forms.
  • Hearing being done through video-conferencing facility.
  • E-mail as mode of service.
  • Procedural inconsistencies and unnecessary blocks in speeding up disposal removed by amendments.
Timelines for expedited examination

Examination of patent filings are expedited especially for applications by start-ups, female applicants, small entities, and applications pursuant to bilateral agreement with foreign patent offices etc.

Timeline details as mentioned below:

  • Examiner to give Examination Report to controller within one month, but not exceeding two months from date of reference by the Controller.
  • Response to First Examination Report (FER) within six months (with extension of three months).
  • Controller to dispose of the application within three months of the receipt of response from Applicant.
Location of main offices of regulatory bodies

The Office of the Controller General of Patents, Designs & Trade Marks (CGPDTM) is located at Mumbai, Maharashtra. It functions under the Department of Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry.

The Controller General supervises the working of the Patents Act, 1970, the Designs Act, 2000, and the Trade Marks Act, 1999 and also renders advice to the Indian Government on matters relating to these subjects.

The Head Office of the ‘Patent office’ is in Kolkata, the ‘Trade Mark Registry’ is in Mumbai, and the ‘GI Registry’ is in Chennai. The Offices of ‘The Patent Information System’ (PIS) and ‘National Institute of Intellectual Property Management’ (NIIPM) are at Nagpur.

Labor market

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 liability 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.

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.

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

Economic Sectors

Sectoral subdivision

Share in %

Agriculture

Agriculture, forestry and fishing

20.19%

Industry

Manufacturing

14.43%

Construction

7.16%

Electricity, gas, water supply and other utility services

2.7%

Mining and quarrying

1.63%

Services

Financial, real estate and professional services

22.05%

Public administration, defense, and other services

15.42%

Trade, hotel, communications and broadcasting related services

16.42%

Source: National Statistical Office, Ministry of Statistics & Programme Implementation

India’s services sector contributes 40 percent to the country’s exports and enjoys a trade surplus, with close to US$90 billion reported in 2020-21. The US$194 billion IT and ITeS sector continues to dominate India’s services trade, with software services accounting for a little over 40 percent of services exports, according to the Reserve Bank of India’s annual report published May 2021.

India's software services export stood at US$128.6 billion in 2019-20, showing 9.1 percent growth over the previous year, as per the RBI. The Services Export Promotion Council (SEPC) expects India’s services exports to grow 10 percent in FY 2021-22 led by growth in professional and management consulting, audio-visual services, freight transport, and telecommunications.

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 aluminum), 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 2021-22 is estimated at 8.9 percent as compared to 7.3 percent in FY 2020-21. In terms of value, real GDP for the year 2021-22 is estimated at INR 147.72 trillion

Alternatively, the real GDP estimates for the year 2018-19, 2019-20, and 2020-21 were INR 140.03 trillion, INR 145.69 trillion, and INR 135.13 trillion, respectively. The 2020 estimates are an anomaly, owing to contraction because of the COVID-19 pandemic.

However, growth has gradually picked up pace, resting on public administration services, manufacturing, construction, as well as the hospitality industry.

India’s economy has seen phenomenal expansion since the 1991 reforms, which opened the country to foreign capital. India's share of global GDP rose to 7.09 percent in 2019 when adjusted for purchasing power parity (PPP) and is projected to increase to 8.36 percent by 2026.

Geopolitical factors

International geopolitical developments like the Russia-Ukraine conflict might impact the global economy, in turn spilling over into India’s GDP goals. However, latest arrangements between India and Russia for buying discounted oil prices from Russia might help India substantially cut its steep energy bills. Discussions are also underway for the two countries to settle on alternative payments channels for bilateral trade since global sanctions have been imposed on Russia. Other unintended consequences include new export markets opening for India, such as for wheat, as countries like Egypt seek to substitute for Russia and Ukraine.

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

As of March 7, 2022, India’s merchandise exports were over US$380 billion and poised to cross the US$400 billion mark by the fiscal year end. India had also registered record services exports upward of US$240 billion as on that date.

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

In FY 2021-22, India received total FDI of US$54.1 billion during April-November, as against US$81.97 billion in FY 2020-21. Indian government data revealed 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.

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