INDIA READER - Ease of Doing Business in India

INDIA READER

INDIAN EMBASSY (VIENNA) Kärntner Ring 2, 1010 Vienna emb.vienna@mea.gov.in www.indianembassy.at

Business India Series by the Indian Embassy (Vienna)

FIND INSIDE  FDI liberalization in India: the latest updates by Industry  Ease of Doing Business in India: From Red Tape to Red Carpet

FDI liberalization and Ease of Doing Business in India ■■ When Global economic growth is modest, India today stands as a bright spot among the global economies. The International Monetary Fund (IMF) in its report has projected India’s growth for 2015 at 7.3%, and rising to 7.5% in 2016. In its report dated 12th November 2015, the IMF said that while emerging economy growth remains fragile and could be derailed in an environment of declining commodity prices, reduced capital flows, and higher financial market volatility, India’s growth will benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices. Moody’s ratings revised India’s sovereign rating outlook to “positive” from “stable”.

■■ Foreign direct investment flows during the 20142015 reached US$ 44 billion. FDI has also for the first time in seven years exceeded the current account deficit. The government’s continued push towards FDI liberalization will continue to aid FDI flows. The Financial Times of London in its ranking of the top destinations for greenfield investment (measured by estimated capital expenditure) in the first half of 2015 shows India at number one, having attracted roughly $31 billion, $3 billion more than China and $4 billion more than the US. Top-5 FDI attracting States/Regions in Financial Year 2014-15 Delhi NCR US$ 6.8 billion Maharashtra US$ 6.3 billion Tamil Nadu US$ 3.8 billion Karnataka US$ 3.4 billion Gujarat US$ 1.5 billion

Top-10 Sources of FDI 2013-14 2014-15

1 2 3 4 5 6 7 8 9 10

Place Mauritius UK Singapore Netherlands Japan USA Germany France Cyprus UAE

Growth

US$ 4.8 bil

US$ 9.0 bil

+86%

US$ 3.2 bil

US$ 8.7 bil

+173%

US$ 5.9 bil

US$ 6.7 bil

+13%

US$ 2.2 bil

US$ 3.4 bil

+51%

US$ 1.7 bil

US$ 2.0 bil

+21%

US$ 806 mil

US$ 1.8 bil

+126%

US$ 1.03 bil

US$ 1.1 bil

+8%

US$ 305 mil

US$ 635 mil

+108%

US$ 557 mil

US$ 598 mil

+7%

US$ 255 mil

US$ 367 mil

+44%

■■ Administrative reforms, simplification of approval processes, including online project approval and easier environmental clearance procedures, are expected to improve business sentiment and the ease of doing business in India. The Project Monitoring Group (PMG) set up under the Cabinet is reviewing a total of 704 projects worth US$ 451 billion. To date the PMG has cleared a total of 411 projects entailing investments of US$ 253 billion. The government has set an ambitious deadline of 2016 for implementing the Goods and Services Tax (GST). A clear cut road map for lowering corporate tax from 30% to 25% over the next 4 years has been laid down.

■■ Other forward looking initiatives by the government include: ■■ Nod for IPOs/FPOs by banks to raise funds, as long as government equity remains 52% or over.

■■ Nod for real estate and infrastructure investment trusts, with tax benefits.

■■ Cabinet nod for 98 Smart Cities Project.

■■ US$ 130 billion proposed for railways over 5 years on schemes including high-speed trains.

■■ Successful conclusion of two rounds of coal block auctions, more lined up. Impasse in mining sector ended with the passage of new bill for regulation and development.

■■ Successful conclusion on auctions for telecom spectrum for mobile telephony and broadband.

■■ Single-window scheme for various clearances to steel, coal and power projects.

■■ Clarity in tax treatment on income of foreign fund whose fund managers are located in India, as also on transfer pricing for resident and nonresident tax payers and waiving of retrospective imposition of a minimum alternative tax (MAT) affecting foreign funds.

■■ The Ujwal Discom Assurance Yojna (UDAY), which is optional and to be operationalized through signing of a tripartite MoU (between Ministry of Power, the concerned State Government and the Discom) seeks to provide a solution to State Discoms and empower them to break-even in next 2-3 years through the following 4 initiatives: ■■ Operational efficiency improvements like compulsory smart metering, upgradation of transformers, meters etc., and energy efficiency measures like LED bulbs, agricultural pumps, fans & air-conditioners etc. This will reduce average AT&C loss from about 22% to 15% and eliminate the gap between average revenue realized (ARR or user charges) and average cost of supply (ACS or cost at which electricity is procured) by 201819.

■■ Reducing the cost of power, would be achieved through measures like increased supply of cheaper domestic coal, coal linkage rationalization and liberal coal swaps from inefficient to efficient plants.

■■ Debt restructuring will reduce the interest cost on loans taken over by the states to around 8-9%, from as high as 14-15%.

■■ Enforcing financial discipline on discoms through alignment with state finances.

■■ Contracts to set up two locomotive plants in Bihar were awarded by the Railways Ministry. The contracts are two of the first and the largest to be awarded to foreign firms since India last year allowed 100% FDI in the railway sector. General Electric Co. (GE) will build a diesel locomotive factory in Marhora and Alstom SA will set up an electric locomotive unit in Madhepura. The plants will be set up at an estimated cost of around Rs. 2,052 crore and Rs. 1,294 crore respectively. The two projects involve manufacturing 1,000 diesel locomotives and 800 electric locomotives over the next 10 years and are

together worth about Rs. 40,000 crore. While the Railways will have 26% equity and provide land, the foreign companies will have a stake of the remaining 74% in each of the plants. The plants will be up and running within 3 years and 80% of all parts used in the manufacture of the locomotives will be sourced locally.

■■ Medium-term growth prospects have also improved following recent policy initiatives towards unlocking coal and other mining activity, liberalization of FDI limits (100% in railways, 49% in insurance, and 49% in defence with the caveat that FDI in defence could go up to 100% with the control vested in the hands of the Indian JV partner and approval be secured from the government) and a renewed thrust on public investment in infrastructure, which would help to improve the investment climate. To boost the investment environment in the country, the government has further eased FDI norms across 15 sectors. The cap for approval by the Foreign Investment Promotion Board (FIPB) has been increased to Rs. 5,000 crore from Rs. 3,000 crore.

Highlights of some of the new FDI norms include: ■■ Construction & Real Estate: ■■ Requirements such as minimum floor area of 20, 000 sqmt in construction development projects and minimum capitalization of US$ 5 million to be brought in within the period of 6 months of commencement of business have been done away with.

■■ Further, each phase of construction development project will be considered as a separate project for the purposes of FDI. ■■ A foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, subject to a lock-in-period of three years.

■■ Lock-in period will not apply for FDI into hotels and resorts, hospitals, SEZs, educational institutions, old age homes and NRI investments.

■■ Real Estate Business will mean as ‘dealing in land and immovable property with a view to earning profit threrefrom and does not include development to townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.

■■ Further, earning of rent/income on lease of the property, not amounting to transfer, will not amount to real estate business. As such, FDI is not permitted in an entity which is engaged or proposed to engage in real estate business,

construction of farm houses and trading in transferable development rights (TDRs).

■■ 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes and business centres.

■■ Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-inperiod of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

■■ Banking ■■ The composite FDI cap is the Banking sector has been raised to 74%. Government has decided to introduce full fungibility (a good or asset’s interchangeability with other individual goods or assets of the same type) of foreign investment in Private Banking.

■■ FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74%, provided that there is no change of control and management of the investee company.

■■ Plantation ■■ Apart from tea, 100% FDI under the automatic route is now allowed in coffee, rubber, cardamom, palm oil tree and olive oil tree plantations.

■■ Broadcasting ■■ The government has raised the FDI limit in news and current affairs TV channels and FM radio to 49%, up from the exiting cap of 26%.

■■ FDI limit in Teleports, Direct-to-Home (DTH), digital cable networks, Mobile TV and Headend in the Sky services (HITS) – a satellite-based system to deliver TV channels to cable operators – has been raised from 74% to 100% (up to 49% via automatic route and beyond 49% through government route).

■■ Retail ■■ Manufacturers will be permitted to sell their products through wholesale and / or retail, including through e-commerce without government approval.

■■ While the extant FDI policy mandates single brand retailers to procure 30% of their goods sold in India over a period of 5 years beginning from the date of receipt of FDI, the new policy will allow the retailer to meet the norm from the date it opens the first store. The move is expected to help retailers such as IKEA, which typically

require 12-18 months to build a store and an additional two years to put in place sustainable supply chains and business processes.

■■ Furthermore, in certain high technology categories (e.g., Apple products) where it is not possible for the retail entity to comply with the sourcing norms, it has been decided to relax the sourcing norms subject to government approval.

■■ Entities, which has been granted permission to undertake single-brand retail trade will now be permitted to undertake ecommerce activities.

The new rules will allow retailers such as Marks & Spencer, Zara, H&M, GAP, Adidas AG, Swatch SA, IKEA, etc., to sell online through their own online platforms.

■■ The new rules will also allow brand owners to undertake both the activities of single brand retail trading (SBRT) and wholesale with the caveat that the FDI policy on wholesale/cash & carry and SBRT have to be complied by both the business arms separately. This move is expected to help India’s homegrown brands to leverage foreign capital and strengthen their market presence.

■■ 100% FDI is now permitted under automatic route in Duty Free Shops located and operated in the Customs bonded areas.

■■ Aviation ■■ FDI of up to 49% under automatic route is now allowed in Regional Air Transport Services.

■■ Foreign equity limits in Non-Scheduled Air Transport Service and Ground Handling Services have been increased from the exiting 74% to 100%.

■■ Defence ■■ FDI of up to 40% is allowed in the defence sector under the automatic route.

■■ Portfolio investment and investment by Foreign Venture Capital Investors (FVCIs) will be allowed up to 49% under the automatic route.

■■ Proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB).

■■ In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by exiting investor to new foreign investor, Government approval will be required.

■■ As a result of the above measures, India has moved up 16 positions to rank 55th on a global index of the world’s most competitive economies compiled by the World Economic Forum. The jump in India’s position underlines the country’s recent economic recovery, improvement in the competitiveness of the country’s institutions and its macroeconomic environment. According to the baseline Profitability Index of the Foreign Policy Journal, India has recently been ranked No. 1 among 110 countries making it the world’s topmost investment destination. The US International Trade Commission in its report Trade and Investment Policies in India (2014-15) mentioned that the Indian government has made significant changes in addressing barriers to trade and investment. Areas identified in the report where significant policy changes have been made include: FDI; tariffs and customs procedures; local content and localization requirements, particularly concerning

ICT goods; and standards and technical regulations.

■■ The World Bank now ranks India at 130 out of 189 countries on the Ease of Doing Business. That is up 12 places from its original ranking last year and 4 places from its rank on a revised list (based on a new methodology). According to the WB report, it takes 29 days to start a business in India today, unlike the 127 days it used to take in 2004. The biggest improvement was seen in the area of providing electricity connection to businesses, where India’s ranking improved from 99 in 2015 to 70 in 2016.

India is ranked 8th in terms of protecting minority investors, 42nd in getting credit. Forward movement on the goods and services tax (GST), setting up of commercial courts, enacting the bankruptcy law, simplifying taxation and corporate law, and easing the entry-exit norms are expected to give a boost to India’s ranking in the coming year.

FIND OUT MORE! FOR COMPLETE INFOS AND UPDATES ON INDIA'S FDI POLICIES AND SCHEMES, VISIT THE WEBSITE OF THE DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION, MINISTRY OF COMMERCE AND INDUSTRY:

http://dipp.gov.in