Indo-German Investments & Cooperation FDI inflows set to grow in 2010-2011 The importance of foreign direct investment (FDI) for the development and the well-being of an economy is well accepted. In the last years, the Government of India has undertaken many steps to further improve the investment climate for foreign investors. FDI under the Automatic Route is permitted in most sectors; only for a few sectors the prior approval of the government is needed. In April 2010, a Consolidated FDI Policy circular was published for the first time, a single document which now combines all the prior policies/ regulations on FDI in order to make India s FDI policies most transparent, predictable, simply and clear for potential investors. It is expected that the FDI legislation will be further liberalized in the forthcoming months and, therefore, further encourage investments from abroad. Limitations for foreign direct investments exist currently still in sectors such as telecommunication, media, civil aviation or banking and insurances. FDI in atomic energy, defence or multi-brand retailing are completely prohibited. However, especially for investments in the defence sector and multi-brand retailing, the Department of Industrial Policy and Promotion released a number of discussion papers and encouraged the feedback of the relevant stakeholders. A governmental committee has been set up to evaluate the feedback and find common ground for a possible deregulation. In order to boost renewable energy development and to solve different energy problems, foreign direct investments in renewable energy are also allowed now up to 100%. Moreover, the establishment of special National Manufacturing Investment Zones, i.e. specially marked areas for manufacturing that will cater to both export and domestic markets, is being discussed. Manufacturing zones target to increase the share of manufacturing in India s GDP. Although foreign direct investments had globally weakened in the last two years (-44% for developed countries), South, East and South-East Asia registered the least decline in 2009 (-17%) and remained the largest recipient among the developing economies, accounting for almost half of the total inflows. India is again highly ranked among the top investment locations in the most recent United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2010 and moved up from third to the second place in the top host economies for FDI in 2010-2012. FDI inflows have picked up since mid-2009 and are rapidly expanding. South, East and South-East Asia are also the first to break out of the downturn on foreign investment flows. The region has also reshaped the global FDI landscape because it accounts now for one fifth of the FDI inflows worldwide. According to UNCTAD, India also improved its ranking in the 2009 Inward FDI Performance Index to rank 63 compared to the ranks 82 in 2008 and 111 in 2007. The most recent A.T. Kearney Foreign Direct Investment Confidence Index 2010 lists India as one of the most attractive investment locations worldwide. Though it moved down one place compared to the 2007 report, India is top-ranked as number three after China and the USA. According to A.T. Kearney, investments in China, India, and Brazil are indispensible for today s investors in order to succeed on tomorrow s markets. India is the top-location for non-financial service investment, but also scores highly in heavy industry, light industry and financial services. Similarly, India ranks both time number one on the A.T. Kearney 2009 Global Retail Development Index and 2009 Global Services Location Index. According to the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, the cumulative amount of FDI inflows (equity inflows including data on re-invested earnings and other capital) into India from April 2000 to May 2010 reached now US $ 168 943 billion. The cumulative amount of foreign direct investment equity inflows from August 1991 to May 2010 amounted to US $ 136 855 billion. During the financial year 2009-10 (April 2009 to March 2010), foreign direct investment equity inflows stood at US $ 25 888 billion compared to US $ 27 331 billion in 2008-2009 and US $ 24 580 billion in 2007-2008. Due to the economic crises, foreign companies had postponed some of their investments and as a result, the FDI inflows did not show the tremendously high growth rates as the last years had shown. However, all signs point in the direction that FDI growth rates will improve again in the financial year 2010-2011 and forthcoming. - Jana Helbig, E-mail: helbig@indo-german.com Annual Review 2010 107
FDI inflows dip slightly during last fiscal On account of the global economic slowdown, during the last fiscal (Apr. 09-Mar. 10), the Foreign Direct Investment (FDI) equity inflows registered a slight decline of 5.3% over the previous year amounting to nearly US $ 25 888 million. Cumulative FDI inflows received during the post liberalization period i.e. 1991-2010 was to the tune of US $ 130 214 million(table 1). Since 2004, investment inflows into India were on a steady rise of above 40% after a decline during the period from 2002 to 2004. The year 2006-07 was an exceptional year with a 187% growth in FDI inflows, amounting to more than all investments during the period from 1991 to 2000 put together. During the last fiscal (Apr 09-Mar 10), however, foreign investments suffered a slight setback with inflows declining a little over 5% over the previous year. Table 1 For foreign investors willing to invest in India, it made sense to set up a subsidiary in Mauritius and route their investments through that country. By doing so, they would avoid paying capital-gains tax all together. India does not tax because the company is based in Mauritius and Mauritius had anyway exempted investors from capital-gains tax. In addition to this, Mauritius also has low rates of dividend and income taxes. USA was the second largest investor with investments to the tune of US $ 10 729 million and a share of over 8% of total investments. Singapore, UK and Netherlands were next to follow with investments amounting to US $ 10 534 million (7.95%), US $ 6554.5 million(4.95%) and US $ 5 115 million (3.86%). These top five investing countries took up nearly 64% of total investments into India during this period. Germany is the eighth largest investor for India with investments amounting nearly to US $ 3 471 million and a percentage share of over 2.6% of total investment inflows into India since liberalization. Table 2 Note: The amount of inflows on account of ADRs/GDRs has been removed fromthe FDI data base to align the FDI data as per the international best practices Foreign Direct Investment inflow since liberalization Mauritius is quite predictably the top investing country for India during the period from August 1991 to March 2010, where investments touched US $ 50 848 million taking up more than 38% of total investments inflows into India (Table 2). Foreign Direct Investments inflows from Mauritius have always been maximum on account of the Double Taxation Avoidance Agreement. In 1992, when FIIs were allowed into India, Mauritius passed the Offshore Business Activities Act, which allowed foreign companies to register in the island nation for investing abroad. The benefits for this were: Total exemption from capital-gains tax, quick incorporation (a company is formed in Mauritius within two weeks), total business secrecy and a completely convertible currency. Foreign Direct Investment inflow during April 08-March 09 While the countries featuring in the top ten list with respect to investment inflows during the last financial year (Apr. 09 to Mar. 10) remain quite the same as the previous year, the rankings changed somewhat. Mauritius was as usual right on top with investments worth US $ 10 376 (Table 3). Even though the volume of investments from Mauritius declined by 7.4%, the country s share in the total investment inflows into India remained around 40%. Singapore and USA followed in the 2 nd and 3 rd positions, whereby investments from USA increased 7.8% to touch US $ 1 943 million accounting for a share of 7.5%. Japan improved its position by Annual Review 2010 109
Table 3 several notches going up from the 9 th position in the previous year (Apr. 08-Mar 09) to the 5 th last year (Apr. 09-Mar 10) by increasing its investments by 192% from US $ 405 million to US $ 1 183 million. Notable is also the rise of investments from UAE, which went up from US $ 257 million to US $ 629 million taking it from the 10 th position of the previous year to the 8 th position last year. Nearly 80% of total Foreign Direct Investments into India came from the top ten countries. Germany s ranking as far as investments during the last year (9 th ) was one lower than in the previous year (8 th ) even though the volume of investments declined marginally by only US $ 3 million. Investments from France fell over 35% taking it to the 10 th place (from 8 th in Apr. 08-Mar 09) in the list of top ten investing countries during the last financial year. Top ten sectors attracting highest FDI equity inflows The Services Sector (financial & non-financial), Computer Software & Hardware and Telecommunications were the top three sectors that received maximum investment inflows since April 2000 which take up 21%, 9% and 8% of the share of total inflows respectively (Table 4). However, during the last financial year, it Table 4 Annual Review 2010 111
Table 5 *Others include Kochi, Bhubaneshwar, Bhopal, Kanpur, Guwahati, Patna and other regions not indicated **Grand Total includes Stock swapped, Advance of inflows and RBI s NRI schemes Source: DIPP was the top two sectors that suffered the maximum setback in FDI equity inflows. The hardest hit sector was Computer Software and Hardware which saw over 45% less investments over the previous year, followed by the Services Sector where investments declined by over 28%. The amount of inflows in the Telecommunications sector during April 09 to Mar 10 remained more or less equal to the previous year. The industries which attracted more foreign investments during the last fiscal were Power (+46%), Construction Activities (+41.4%) as well as the Automobile Industry (+2.2%). Foreign Technology Cases (FTC) approved post-liberalization The top five industries that have maximum technology cases approved since liberalization are Electrical and Electronic Equipment (1 263), which includes Electrical Equipment, Computer Software, Electronics, Computer Hardware and others; Chemicals, other than Fertilizers (908), Industrial Machinery (872), Transportation industry (760), which includes the Automobile industry, and Air/Sea Transport, Passenger Cars, Auto Ancillaries & Parts and the Miscellaneous Mechanical Engineering industry (444). Altogether 8 112 technology cases were approved since August 1991(see Table 6 overleaf). Top ten regions attracting foreign investments The Mumbai/Maharashtra region continues to attract maximum foreign investments - 35% of total investments since April 2000 (Table 5). Delhi and its neighbourhood which included part of Uttar Pradesh like Noida and Haryana like Gurgaon was the next most important region for foreign investments with a share of 21%. Bangalore and Ahmedabad followed in the 3 rd and 4 th place accounting for up to 6% of foreign in-vestments since April 2000. In the last financial year (Apr. 09 to Mar 10), Delhi and the neighbourhood areas took the lead with investments worth US $ 9 695 million as against investments in Maharashtra, which, with US $ 8 249 was in 2 nd position. The third most im-portant region for foreign investments during the last year was Hyderabad (US $ 1 203) followed by Bangalore (US $1 029). Germany accounted for nearly 14% of all Foreign Technology Cases (FTC) approved by the Indian government since liberalization. The top five sectors which received maximum technology approvals were Industrial Machinery (209), Electrical & Electronic Equipment (168), Chemicals-other than fertilizers (127), Miscellaneous Mechanical & Engineering Industries (102) and Transportation Industry (94). Nearly 24% of all cases under Industrial Machinery were approved for Germany, followed by Electrical & Electronic Equipment (13.3%), Chemicals (14%), Miscellaneous Mechanical & Engineering Industries (23%) and Transportation Industry (12.4%). FTCs approved for Germany during the last fiscal Only 3 Foreign Technology Cases were approved by the Government of India for Germany during the year April 2009 to March 2010. Two were for the Oil Refinery sector and one for a Boiler and Steam Generating Plant. Annual Review 2010 113
Table 6 114 Annual Review 2010